When you buy capital goods, you can almost always split the payment over a longer period of time. It may be that you can split the payment for a washing machine, a TV or a computer over anything between a few months and several years. The offers are often marketed as interest-free. While this is normally correct, the installment is interest-free does not mean that it is free of charge.
Being able to buy capital goods with slightly larger price tags against installment can be an advantage, but it is important to pay attention to the conditions that apply. The alternative to installment purchases is to take out a loan. This is best done by taking a quick loan where a credit report is not made at UC. Here, however, we find out the most important thing you need to know about interest-free installment purchases.
It is important to take care of the repayments
If you pick up an offer on interest-free installment, you will not have to pay interest during the contract period. Credit rates on installment purchases are otherwise normally relatively high, so avoiding interest rates is of course advantageous. However, the benefit only applies if you manage the monthly repayments to the point.
Many installment purchases are made today through credit companies. Thus, when you buy the washing machine or TV set, you get a debt to the credit company, not to the merchant, and it is common for the credit companies to put up the debt as a current credit. Not infrequently, you can also connect to a credit card.
The fact that the installment purchase is a typical credit purchase can mean that you have the opportunity to pay off with smaller amounts each month. If you choose to take advantage of this opportunity, you will no longer receive the benefit of the installment purchase agreement running without interest.
Of course, also for installment purchases that are not linked to credit, you must pay on time. Delayed payment leads to reminders and the lender obviously has the entire battery of other recovery measures to take advantage of.
Charges of various kinds
Why is there the concept of interest-free installment purchases? The person who is responsible for the actual cost towards the merchant does not earn anything on the deal unless you pay no interest.
However, paying no interest does not mean that the installment purchase does not come with extra costs. You can always count on fees of various kinds.
Firstly, a setup fee is often charged to give you the benefit of being able to split the payment. This setup fee can be very modest, but normally it is at least 300 USD. Thus, a TV with the price tag $ 10,000 really costs $ 10,300.
Secondly, invoice and / or administration fees are rarely charged. This is about smaller amounts that are added to each monthly invoice. It can for example be about $ 30 or $ 40. Sometimes you may have the option of avoiding this charge altogether by using direct debit, but the most common is instead that you get a discount if you use direct debit.
In the example below, you can see how the charges affect the total cost and the effective interest rate. As you can see, the costs can go away. An alternative to installment purchases can be a regular private loan. See and compare private loans here.
Effective interest rate – an example
You have a new computer that costs $ 7495. You have not saved such an amount, which is why you would like to receive a payment offer. To your luck, you see that the merchant offers interest-free installment and that only charges are added.
The different fees for your credit purchase are two. First and foremost, you pay a setup fee of $ 695 and you must also pay an administrative fee of $ 39 per month. This gives a total cost of $ 9126 and an effective annual interest rate of 21.54%. The interest-free installment purchase is thus not immediately free.