Have you heard it before? Probably. Offers on interest-free installments have been around for a long time and it is becoming increasingly common for retail chains, in collaboration with various lenders, to attract these types of offers. The only problem is that the part payment often risks becoming much more expensive than you had imagined.
The reason for this is that most offers of this type are conditional on several other types of extra costs, such as a set-up fee, administrative fee and a running fee.
The effective interest rate
That is, the total loan cost calculated in one year, can thus be much higher than you expected. This is explained by Maria Wiezell, who is a consumer advisor at the organization Swedish Consumers.
One should pay close attention to what fees are added, because it is not at all uncommon for stores to offer zero interest rates, but so are costs anyway, she says.
Let’s take an example. You should buy a new computer that costs USD 10,000 and choose to post a partial payment for 12 months. The interest rate, as promised in the offer, is zero percent. On the other hand, a setup fee of USD 295 is added and a monthly administration fee of USD 29. In a year, this means a total cost of USD 643, which gives an effective interest rate of 11.53 percent. Should you also be late with a part payment or not have enough money in the account when the money is to be deducted from the direct debit, then the risk is that the final note is rushing away, explains Maria Wiezell.
One of the most common problems
Is precisely that something goes wrong with the payment or that you do not have enough money in the account on the day the money is to be withdrawn. It may be enough that there is no USD 10, so it can steal the whole idea with interest-free. Suddenly you get completely different costs.
Another common problem that may arise is that you are misled in how much money you will actually pay back each month. Let’s say that according to the payment plan, you have to repay USD 900 a month, so suddenly you are offered several different options on avin that you get home in the mailbox: USD 900, USD 500 or just USD 200?
This is a common pitfall, because you may not even remember how much you will actually pay back, and you will be offered several possible alternatives. You may think that the payment options are of the lender’s goodwill, but it is not. As soon as you leave the payment plan, the interest rate can be sky high, perhaps up to 29 percent interest per month, says Maria Wiezell.
She recommends anyone thinking of splitting their payment to really read through the agreement carefully, especially the fine print.
– Most people unfortunately do not read the terms so carefully, but it is important. Because in most cases, you have to adhere exactly to the payment plan so as not to risk sky-high interest rates and a final note that you would not have imagined at all.
4 common pitfalls – and how to avoid them
You have your payment on direct debit but have no money in the account on the day the amount is to be deducted. Even if only 5 USD is missing, it can lead to a high interest rate with great risk.
2. You are late in paying an invoice. Even though you are only two days late, the interest rate can run away.
3. You get misled by the lender who offers several different payment options on avin and you happen to pay back too little. This can cost you dearly.
4. You forget to read the fine print stating that the effective interest rate is soaring. The final cost of your purchase will be more expensive than you initially thought. Read more here about things to consider when borrowing money.