Diana Clement: Interest-free deals can cost more up front

Hire purchase is a form of revolving credit, not borrowing on a single item. Photo / Photo / Thinkstock

It's official. I'm a "loser", as well as all the other accusations readers fire at me. This time it's for suggesting that "interest-free" HP deals are duds.

Interest-free offers on everything from TVs to mag wheels are popular across the socio-economic spectrum, says Rob Collins, general manager of NZCU Auckland credit union. Shoppers often believe, he says, that by taking the interest-free deal they'll make money thanks to the interest they receive from their bank.

As this reader wrote to me: "Oh okay, if I can afford to pay outright but choose to keep my money in the bank and benefit from 48 months' interest-free, you are calling me a loser?

"Well I am calling you a loser for missing out on the interest you could save. The new retail laws mean you cannot get a better deal for cash (as this would be the cost of finance in the so-called interest-free deal), so if you can purchase at the same price as cash but interest-free, then it's a win if you have the money available. 6k in the bank [for the win]."

The reality is that everyone who takes out an interest-free deal pays more up front for the item in question than those who pay by cash, bank credit card or Eftpos.

That's because even the interest-free HP deals are loaded up with establishment and annual fees. They are not "cost-free".

"They [the people buying interest-free deals] are not taking into account that they are paying $45 a year in fees, if nothing else," says Collins, whose organisation helps clients pick up the pieces when their HP deals through finance companies go bad. He adds that the $45 is from tax-paid income, meaning the shopper needs to earn more than that on the money left in the bank. "If it's on a $2000 [HP], you may be losing money."

Dr Claire Matthews, director of financial planning at Massey University's centre for financial services and markets, points out that the up-front fees are the same on a six-month deal as a longer one. "Quite quickly those fees can represent a significant effective interest rate," Matthews says.

As for me, my time would be spent more economically going over my taxes with a fine-tooth comb or fine-tuning my budget rather than playing the HP roulette game for a few measly bucks at best.

Sadly little can be done to stop the stampede to interest-free deals. The next best thing is to attempt to educate the people who write this sort of letter: "Have just read your article with interest and would just like to say a big thank you to Q Card as thru them ... we were able to purchase something that we always wanted to own. The interest rate was only 19.75 per cent and the establishment fee only $35."

Hire purchase has changed in recent years.

When you trot off down to the shops to get HP you're actually taking out revolving credit, not borrowing on a single item.

After signing on the dotted line a plastic card with a credit limit arrives in the mail, allowing shoppers to load up the trailer with more goods on HP any time you feel like it.

Interest-free deals can have very tricky fine print.

Here are some points to be aware of before you next head to the shops looking for a "deal".

Point 1: Collins points out that the loan protection insurance sold with interest-free and other HP deals adds to the cost and is sometimes included unless the customer opts out.

"A skilled salesperson will try to add on general insurance as well," he says.

These insurances are often mis-sold. For example, says Collins, shop staff will sell loan repayment insurance to unemployed or self-employed people who won't be entitled to claim.

The additional insurances on HP deals can cost as much as 10 per cent of the value of the item - or $200 on a $2000 sofa.

Point 2: Shoppers are at risk of being hit with extra charges if they fail to make a payment for some reason. Human beings make mistakes and forget things, such as paying bills on time, or ensuring their account can cover automatic payments. That may mean paying fees to both the bank and the finance provider if a payment is dishonoured or to the bank if it is honoured. Both add up.

Point 3: The reality is that people paying cash do bargain with retailers. Sometimes buyers ask for extras to be thrown in - such as free cables with a TV or Scotchguard treatment on a sofa. Those taking out HP are less likely to ask.

Point 4: Fees, fees and more fees. As well as establishment and annual fees there are others. Let's say you buy a $2000 sofa on an interest-free deal. With Q Card, for example, there is a Personal Property Securities Register fee of $3. There are other fees that borrowers could face such as a Fixed Instalment Plan Prepayment Fee, if you pay the deal off early; statement reprint, card replacement fees, and variation fees. I noticed that Q Card can "introduce new fee types from time to time by giving you at least five business days' notice".

Point 5: The monthly bill may be for the minimum payment on the outstanding balance, not for the amount someone needs to pay to clear the debt by the end of the interest-free period.

Point 6: Early repayment. If you have a six-month interest and payment holiday on a three-year HP deal, you are still going to have to pay 2.5 years of exorbitant interest, which adds up. If you repay early, you may be hit with an early repayment fee.

Point 7: Customers often don't pay off the interest-free sum within the "free" period. In one case that the Commerce Commission settled out of court against GE Money, the majority of customers hadn't paid the item off by the end of the interest-free period.

The lender then takes its pound of flesh.

In the GE Money case more than 3000 customers who didn't pay the item off were charged interest backdated to cover the "interest-free" period, breaching the Fair Trading Act.

Point 8: If you have more than one interest-free deal, make sure you know how the payments are being allocated. Trade Me member ajn255 had two interest-free deals and found that all the money paid each month was being allocated to the item with the longer interest-free period rather than being split between the two.

That meant no money at all was being paid off on the later purchase that only had a six-month interest-free period. Come the end of that period and ajn255 would have been hit with interest on the full purchase price for the second item.

"It's how they make their money and keep you paying forever," replied english-rose.

I noticed that GE's Gem Visa (which replaced GE Creditline cards) terms and conditions state: "We allocate payments to your account in accordance with internal business rules ... In relation to any specific payment you make, we will consider any reasonable request to apply the payment to particular liabilities you have under your credit contract, but we retain the discretion to grant or decline such requests."

This is one reason, says Matthews, to make sure that you stick to one HP deal at a time to ensure you do get the best out of the interest-free period.

Point 9: Interest-free deals often come with "deferred payment" advertised as "buy now pay later", or "no payments for x months". Shoppers may pay nothing for two or three years, at which point they still owe the entire cost, on an item that has become long in the tooth.

That could be galling for some people who are already coveting the next big thing in TV design or technology.