Loans Articles

We all like to enjoy the nice things in life, all those luxury items that perhaps we don’t really need, but want anyway! It always feels good to drive around in a new car, get home and relax in front of the most up to date television and home theatre system whilst reclining in the comfort of your brand new three piece suite. Although we all like to own these and other such items, they can often be rather expensive and with factors such as high mortgage interest rates, increased worries about job security and a general economic slowdown, many of us are reluctant to be parted from our hard earned cash!

The retail sector is feeling the effect of this slowdown. Many shops and outlets are reporting poor sales figures, partly due to the factors already mentioned, but also due to an increasing number of retailers all competing for the same customers, coupled with additional pressure from online stores and internet sites undercutting high street prices. In order to remain in business, retailers are having to offer incentives to potential customers to try to stop them going round the corner to buy the exact same item cheaper from their competitors. One method which is regularly used to close the deal is to offer zero percent finance, or interest free credit.  

Interest free loans and credit agreements can be a particularly attractive option to someone purchasing an expensive item as it means that they are able to pay for it over a longer period, or defer payment to a later date, without incurring any additional costs. Even if an individual has the necessary funds available in savings to make the purchase, It can be beneficial to take out a zero percent loan, as they would still receive interest on their savings for the duration of the loan term.

Interest free credit can take various forms, but the most common options are either a loan agreement where monthly repayments are made to repay the debt over a pre-agreed term, or “buy now pay later” deals where no repayment is made, but the whole amount falls due as a single payment after a certain term. Interest free credit is usually offered over a relatively short period such as one or two years, but it is possible to obtain deals which run over longer periods, sometimes up to four years. This is normally down to how keen the retailer is to sell his product, or how much competition he is facing.

Although interest free loans appear to be a highly attractive option to anyone, there are still areas for concern that an individual must be aware of prior to applying. With any arrangement of this nature, the funding is provided through a loan and as such the finance will be through a loan agreement. The applicant will be subject to a credit score to check his or her credit rating. This will leave a “footprint” on the individual’s credit file, which can have an adverse effect on their overall credit score. Because of the benefits offered by interest free credit, lenders are only likely to approve a loan to those applicants with a high credit score. Someone who has a poor credit rating, or who has had financial problems in the past, would most likely be declined for this type of loan deal.

Another factor to be aware of is that although the interest free term of the loan may be only for two years, for example, very often the overall loan term is for a longer period and if monthly repayments are being made, the regular payment which is initially set up by the lender can often be based on repaying the loan over this longer term and it is up to the borrower to arrange to make additional payments. If the interest free term is exceeded without full repayment being made, interest is then charged on the outstanding balance of the loan. The penalty for exceeding the interest free period can be large, with annual percentage rates (APR) of interest often in the region of thirty percent. In some instances this interest is charged retrospectively, being back dated to the original start date of the loan, which can add a large lump sum on to the outstanding loan balance in addition to ongoing interest charges. In this situation, any benefits of an interest free loan would have been completely cancelled out and the borrower would probably have been better off with a normal loan at a reasonable rate of interest. The same applies to “buy now pay later” deals, although the penalty for non repayment by the due date can be even more severe, as no repayments have been made at all and therefore the outstanding balance has not been reduced from the original amount borrowed.

So what are the options for someone who already has some form of interest free credit which they will be unable to repay before the due date? If an individual does not have the funds available to make the repayment, it could be possible to refinance the loan through a bank or other finance company. Although interest would be charged on this new loan, it would be likely that this would be at a lower rate than that charged by the original loan company. It would also be possible to avoid any penalties such as back dated interest charges being added, provided that the new loan completed prior to the due date of the interest free credit.

Although this course of action could save a borrower a great deal of money, clearly the best option is to ensure that adequate repayments are made on any interest free credit arrangement, or funds are made available by the due date to clear the full outstanding balance of the loan. If you are considering entering into a deal of this type and are unsure as to whether or not you will be able to repay the debt by the due date, you should really ask yourself the question “do I really need to make this purchase?” If the answer is still yes, you should, as with any other type of loan, check the details of the loan agreement and ensure that you fully understand the implications of what you are entering into.