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Low rates not so good 20 Jun 2017

Many retailers occasionally offer “special deals” of 0% percent interest on hire purchases. Does it mean you pay only the ticket price over the term of the loan?

The answer is no, and in fact the total price can be very expensive.

If you add up establishment fees, annual fees and any other cost the vendors may add, you will get some idea of the cost of the borrowing.

For example, an appliance costing $700 could be financed by one of the leading dealers at 0% finance. The deal included an establishment fee of $55 and what appeared to be an annual account fee of $52. The salesperson was a bit vague.

That would make a total of $211 ($55 + 3 times $52) for a 30-month agreement.

If you take the average between the debt at the start of the contract and the debt at the end of the contract, you get an average debt of $350. You can now see why the $211 is such an enormous figure to be paying.

Divide it by 30 months and multiply by 12 months and you have the cost per year of about $84. That's an interest rate of 24% ($84 divided by the amount borrowed being $350).

Even if these figures are not entirely accurate, do your homework and determine the true cost of borrowing. You might be a lot better off with a bank overdraft.

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