Is Interest Free Credit Worthwhile?

Although it is rare these days, there are some companies that now offer interest free credit. This might be on items when you purchase them, such as when you buy cars from certain dealers or it might be on a credit card, for example. These deals sound really great, but you may wonder what the companies get out of them. How will they profit if they lend you money and do not charge you for it? You are right to be cautious as there may be reasons for it that they may be trying to take advantage of you with.

If you are being given the option of interest free credit on goods, then you need to think about how the company can afford to give you that. They will be taking on a risk that you will not make all the repayments and therefore they may not get back the full value of the items that you are buying, so why would they offer it? Obviously they want to tempt you into buying from them but it is still a risk for them and that is why they are likely to price their items very high. If they price it at twice the cost, for example, then after half the repayment period the costs will have been covered and the rest will be profit. This means that if you have trouble making repayments in the future, they will at least have got back the cost of the item. This business model means that whenever you buy an item that has interest free credit, you should be careful to think about whether it is priced fairly. Obviously if you want free credit then you will need to be prepared to pay extra for it as it is an additional service, but it could be that you can get the item much cheaper elsewhere and perhaps saving up for it or borrowing the money from somewhere else to pay for it, could be much better. It is therefore well worth doing some investigations to find out.

It is also worth thinking about what might happen if you cannot make the required monthly payments. You may need to take out an online payday loan to make ends meet. If you take a look in the terms and conditions you will see what the consequences of this would be. It could be that you will be charged a fee or that you get charged interest. This won’t be advertised, so you will need to look hard to find this information. It may be best to phone customer services and ask them as they will have the information to hand. You could find that if miss just one payment, that you will end up having to pay significantly more. Therefore you need to make sure that you are really confident that you will be able to cover those repayments and have a backup plan just in case there is a month when you get stuck for money. It could be wise to keep a couple of months repayments in a savings account just in case.

If you have an interest free credit card, then things work a little differently. You will have a certain period of time when you are not charged interest on any outstanding balance. This might be for six months or longer if you are lucky. Once this period of time is over, you will then start being charged interest. This interest tends to be pretty high compared with the interest charged on other credit cards. Therefore the card can be a really good way to get some interest free credit for a period of time, but you need to make sure that you have the funds to pay it back when this interest free period is over. If you do not, then you will end up paying high interest and if you leave the debt outstanding for a long time, it could be that you will end up paying more in interest than you would had you borrowed it on a standard card. You may also not have been tempted to borrow so much money had you seen the interest charges each month on your statement.

So although interest free credit can be really great, you do need to be cautious about it and make sure that you calculate whether it really will be cheaper for you.

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