Despite appearances, interest free credit can turn out to be surprisingly expensive.
Here’s how 0% finance works
With 0 per cent finance, the retailer (or estate agent) pays the interest, not the buyer (or homeowner). There is also often an ’admin’ fee per transaction and a monthly charge for the retailer/estate agent to offer this service.
It is then up to the retailer/estate agent to decide how much of that cost is added to the price of the product or service. In theory, they can decide to absorb the cost themselves. In practice, the interest and other costs are usually added to the price of the service or product.
Now, if you are offering interest free credit, you must provide the product or service at the same cost to all customers – whether they want credit or not. If you can get it cheaper by paying at the point of purchase, then the higher cost for paying later is effectively interest – which would mean that it’s not interest free.
Higher costs for all
That means that the same, higher, cost has to apply to everyone. Even those who could pay at point of purchase have to pay the higher price because the same price has to be applied to all.
But, you may say, it at least allows those who can’t afford to pay upfront to get their home on the market. Possibly, but there are better ways of doing it.
Credit card works out cheaper than 0% finance
Paying by credit card is almost invariably cheaper and easier to manage. Let me illustrate with an example (or take a look at the graph above). Someone I know with a home worth somewhat less than £100,000 was recently quoted £480 for a Home Report with 0% finance. In fact, they could have got a Home Report from the same surveyor for £360, a difference in cost of £120.
Say you pay that £360 for your Home Report by credit card and pay only the interest until your home sells – at which point you pay off the whole thing. How do the costs stack up?
If your home takes six months to sell, the total cost on your credit card (applying the average interest rate for credit cards according to Moneysupermarket) would be around £390. In other words, putting the cost of the Home Report on your credit card and waiting to pay it off for six months would be £90 cheaper than the Home Report with 0% interest.
Even if it takes a year to sell your home (and I sincerely hope it won’t) the cost of the credit card option rises to £420 – still £60 cheaper than 0% interest. Of course, if your home sells quickly, the interest cost on the credit card option is negligible. And you still have the option to pay off your credit card in full and bring all interest payments to an end if you suddenly find yourself with the funds to do so.
In short, paying by credit card gives you greater control of your costs than interest free credit.
To be fair, this interest free credit option appeared to last for two years. But who is going to leave their home on the market for two years? And who wants to pay for two years interest when it’s not necessary?
Finally, advocates of interest free credit say that it allows people without the credit history necessary to get a credit card to put their home on the market. Really? Applications for interest free credit are also credit checked by the lender. So, if you can’t get a credit card, there’s a chance you won’t qualify for interest free credit.
All of which leaves everyone else paying more than they need to.