Why 'buy now, pay later' deals are costly
Paint now, pay later! Interest-free deals are no longer the sole domain of plasma TVs.
Thanks to the likes of Once Credit, a finance company established in 2004, the idea of buying now and paying later has been extended to home renovations. With Once's line of credit card you can paint your home now and watch it dry interest free.
While most large stores offer interest-free deals for items such as computers, lounge suites and other household goods, the idea of your plumber or painter offering you an interest-free deal is quite new.
"We only embarked on the idea three years ago," says Once's head of distribution, Garry Zogbi. "It's a new segment that's been very good for both parties."
The parties Zogbi refers to are Once Credit and the tradies for whom, Zogbi says, sales have grown since they've been able to market services in a different way.
Of course, the best way to fund renovations is through your savings. This way you're certain not to pay interest or fees, and your profit on any renovation will be all the sweeter.
The trouble with cash, though, is that it takes some time to build. To save $5000, for instance, you would need to put away $400 every month in an online saver for a year.
Whacking it on your home loan is far easier, but an extra $5000 over 25 years can add $4000 to your interest bill. A personal loan over three years would cost about $850 in interest and credit card interest could, if you stick to minimum repayments, be a massive $13,500. Enter interest-free deals.
In the case of Once Credit's line of credit facility, tradies act as the middle person. They introduce you to Once Credit which underwrites and manages the debt.
The tradie doesn't get paid until the job is completed to your satisfaction. Even better, your interest-free period won't commence until the tradie gets paid. Progress payments work a little differently in that the interest-free period would start with each progress payment made.
So what's the catch? Well, it's pretty much the same as the deals you get at Harvey Norman or Bing Lee. Pay them off on time and you'll be fine. Don't and the cost of the paint job, Vergola roof or swimming pool will certainly blow out.
There are usually two ways you can pay for interest-free deals which are usually up to 24 months. One is to not pay anything at all. You wait until the end of the interest-free period and then pay the full amount plus fees and charges. The other is to pay in instalments.
Different retailers offer different deals, so it's important to read the fine print. Look out for some of the not-so-obvious fees such as what happens if you're late with repayments. Once Credit charges a $25 late penalty fee.
A one-off establishment fee of between $70 and $160 and a monthly account fee of $4.95 also apply.
And interest is payable on any balance outstanding after the interest-free period. As you would expect with these kinds of deals, it's ridiculously high.
Once Credit's website quotes a maximum interest rate of 27.95%, although Zogbi says for home renovations it's 19.95%.
A minimum monthly repayment of 3% of the outstanding balance of the account or $40 (whichever is greater) is required.
But if you stick to these repayments you won't pay off the debt during the interest-free period. To clear the debt during the promotional period, add your purchase price to any establishment or ongoing fees and then divide it by the number of months you have to repay it. If you don't pay by direct debit you'll need to add a $1.95 fee each month.
Interest-free loans are not suitable for all. If you can afford to repay it, then great. The tip here is to watch the standard purchase rate: 19.95% may be on par with reward cards but there are plenty of credit cards at around 11%.
Interest-free deals rely on high purchase rates and that not all consumers pay them off on time. If they did, finance companies couldn't afford to offer them. Zogbi says around 65% of Once customers pay off their debt on time, meaning around 35% don't.
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