What to look our for in Interest Free Deals and Rent to Buy Agreements
With a rental agreement you don’t take ownership of the goods, the rental company always owns the goods. They may offer for you to buy it off them at the end of the agreement for a seemingly very good price, sometimes as low as $1.
All is not what it seems though.
Having looked at two providers of the finance for these deals this is what you’ll actually end up paying (all interest rates and repayments were taken as at September 2016):
Buy goods valued at $2,500 and rent them over a 36 months (3 years) period.
Monthly repayments were $160
This equals total repayments of $5,760 which is $3,260 more than you initially paid.
Monthly repayments were $125.50
This equals total repayments of $4,518 which is $2,018 more than you initially paid.
Buy goods valued at $5,000 rent them over a 60 months (5 years) period.
Monthly repayments were $230
This equals total repayments of $13,800 which is $8,800 more than you initially paid.
Monthly repayments were $149.50
This equals total repayments of $8,970 which is $3,970 more than you initially paid.
Which means under one of the deals you are paying more than double over the 3 year period than you originally outlaid. Which is a little ironical given one of the “benefits” mentioned on the sites for using renting is that you can upgrade your technology without needing to spend lots more money.
The other thing to look out for is when you can upgrade to newer technology. For example, one of the sites said that you had to of already made repayments of $1920 if you bought goods worth $2500 before you could upgrade.
Often people are enticed into these deals by bonus offers, eg spend over $2500 and get $400 back, get a free gift, eg a magazine subscription or a subscription to pay TV for one year. I did note that with this free deal which was for 12 months, you had to enter your credit card details just in case you wanted to extend the TV deal after 12 months.
In our earlier Example One of $2500, even if you put the $400 towards the rental repayments, the goods would still have cost you $5360. It would be pretty normal for people to spend money on other things and not use it to fund the payments.
As a comparison I jumped onto a top 4 bank sites and did calculations on personal loans for these amounts over the same time periods.
The interest rate is 13.39%
$2,500 over 3 years, total repayments would be $2,733 and for $5,000 over 5 years total repayments would be $6,838 (on one of these rental agreements that is more than half the amount).
If you want to repay these contracts early, you will still need to repay the full contracted amount. This means, that on our $2,500 examples, you would still need to repay the full $5,760 or $4,518. There is no discount for paying early. This is also generally the case for personal loans.
Interest free deals
Under these types of repayment plans, you do take ownership of the items.
These usually come in the form of a credit card. The terms are generally set by the retailer and are only offered for set time periods which are advertised and would look like, “this weekend you can get 48 months interest free for purchases over $3,000”.
Things to look out for on these deals:
The credit card will generally have an annual fee, they can also have paper statement fees, payment fees and general account fees.
The big thing to keep in mind is that generally the monthly minimum repayment amounts set out on your monthly statement wont see the amount paid out within the interest free time frame. Generally the minimum repayment amount is about 2.5% of the balance owing.
The way to make sure that you are going to repay the amount within the interest free period is to simply divide the amount owed by the number of months of the deal.
So for the example we used before, say we spent $3,000 and have 48 months interest free, you would need to repay $62.50 per month (plus any other fees). However, initially the minimum amount set by the credit card issuer may be higher than this amount. In this example, the minimum would be around $75 per month initially. You will need to pay the higher amount until the minimum falls below the amount ($62.50) needed to pay it off within the interest free period.
If you don’t repay the amount within the time frame, you will start to get charged interest. As at September 2016 interest rates on cards used by retailers for these deals ranged between 25.99% and 29.49%.
The best way to buy electrical goods, furniture and holidays is with money in the bank. Save up for your big ticket items and buy when you can actually afford them. Holiday companies are even now offering 12 month interest free deals on holidays. Paying for a holiday after you get home is pretty hard, you’ve already had all the fun. A better way is to save up in your own bank account for the 12 months before you go on holiday and then book it. It is much nicer to have a lovely reward at the end of your savings effort.
Don’t use these funding arrangements to buy gifts for people, I’m sure your loved ones wouldn’t want you to go into debt for the sake of a present.
If you do enter into either an interest free feel deal, a rental agreement or a rent to buy deal make sure you understand what you are signing up to, read the document placed in front of you, don’t be rushed by the sales assistance and if you’re not 100% sure start asking questions. As an old boss once told me there is no such thing as a silly question.
This advice is general in nature and doesn't take into account your personal circumstances. For advice that is specific to your circumstances please give us a call on (07) 3018 0587.