Tuesday, 5 February 2008

Making use of the interest free period

A number of years ago, when my wife and I are just starting to settle down, we purchased a central heating system into our house. Mainly because the original heating system broke down and was costing us more to continue to use it. Furthermore, it broke down just the start of winter, so we must get something in quickly.

At the time of the purchase, our cash flow situation did not allow us to make a cash purchase. So we entered into a 12 month interest free purchase agreement. It works by having to pay 30% of it in cash, and the 70% is on credit, interest free for 12 months. Over the 12 months, the only overhead is an monthly administration fee charged by the credit company, a flat fee of $2.00.

Initially, I was particularly nervous about this arrangement as it forced us to be discipline with our repayments and we must ensure that we have the money when the repayments are due. The penalties are quite severe if we miss a monthly minimum payment. For example,
  • overdue fee : $27 to $35
  • over limit fee: $20 to $30
  • interest rate: 28.99%
Yep, the interest rate is 28.99%! Once these are incurred, the interest free period is expired.

Our strategy was this...
  1. calculate our monthly repayments by dividing the amount owing by the number of interest free months.
  2. setup an automatic transfer form our bank account to the credit company's account
  3. monthly review to ensure that it is on track to be paid off before the interest free period expires.
In the end, it worked out well as we paid the amount owing before the expiration of the interest free period.

One thing to look out is the month statement from the credit company. The minimum repayment amount in the statement is the minimum repayment amount, which means that if you are only paying the minimum amount, it is highly unlikely that your debt will be paid in full before the interest free period expires. This is why I calculated my own monthly repayment amount.

We study the terms and conditions quite thoroughly before entering into this agreement so a understanding is gain on the penalties.

photo credit: Andrew Beierle

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Debt Dieter said...

Great post! You're so right about those interest free deals, they only work out if you pay off the whole amount before the due date, or the interest rates will kill you!

I've also read they calculate the interest from the start date of the loan, not the end of the interest free period.

tehnyit said...

@debt dieter, the back interest would really be bad! In some ways, the severity of the penalties forces you to make sure that the total amount is _PAID_ before the expiration date.