Top Buy now pay later explained

You've probably seen the TV and newspaper ads for "buy now, pay later" purchases in stores such as Harvey Norman, Freedom Furniture and Forty Winks, to name just a few. The "interest-free" period generally ranges from six to 24 months, so it can be a good way to buy big-ticket items, provided you're disciplined.

Although you apply for an interest-free loan through retailers such as Domayne, Harvey Norman or Freedom, it will be linked to a finance company — more than likely GE Money, which runs both the Buyer's Edge and CreditLine programs in Australia. HSBC introduced a similar offering earlier this year.

These interest-free offers may also be linked to store credit cards such as the Coles Myer Source card, the GE Money GO MasterCard or the David Jones card. The David Jones card is a traditional store card in that it can only be used at David Jones.

The Coles Myer Source card and GO MasterCard is what GE Money calls a "dual card", explains Skander Malcolm, managing director of card solutions at GE Money. It has the features of a store card in that cardholders get access to special promotions within certain stores, but the card can be used anywhere.

There are generally two types of offers you'll come across. The first is interest-free with instalments, which requires you to make monthly payments over the specified period.

The second is a buy now, pay later arrangement where you don't have to pay the full amount until the promotion period ends. But you are required to make minimum monthly repayments and pay an ongoing fee of about $3 a month. You can make higher repayments if you want to.

Principal solicitor with the Consumer Credit Legal Centre NSW, Katherine Lane, labels this as misleading because although it says buy now, pay later, you do have to make payments in the form of the account-keeping fee and minimum monthly payments over the promotional period.

More than the minimum

HSBC's product is different in that you get 12 months interest free and after that it becomes a personal loan, and the rate is 17.9 percent to 24 percent. With most unsecured loans offering a rate of 13 percent, you may be better off taking out a personal loan at a lower rate from the start.

It's important to understand that minimum monthly repayments will not be enough to clear your debt at the end of the promotional period. "You have to do your own maths," says the co-ordinator of the Consumer Credit Legal Centre NSW, Karen Cox.

You should also find out what other fees apply. With the GE Money Creditline offer for example, there's a one-off establishment fee of $25 and a monthly fee of $2.95. The monthly fee only applies if there is an outstanding balance on the card. If you've kept the card just in case you want to take advantage of an interest-free promotion at a later date, you don't have to pay the fee.

Make sure you read all the relevant paperwork before signing up. "All the terms and conditions, fees and charges are clearly outlined in the documentation provided," says GE Money's general manager of retail finance, Greg White.

Once you take out a loan, you will be sent a card, which you can use again for interest-free promotions. Things can get confusing if you buy more than one item on the card. That's because when you're making payments you can't choose which loan the money goes towards, says Lane. "It's virtually impossible to repay the loan you want to repay."

It's still a debt

"Remember, even if it's interest-free, it is still a debt, it's still money that you owe and you should treat it like any other debt," says Cox. It's probably a good idea to make regular monthly repayments so the loan is paid off in time, rather than hoping you'll have, say, $5000 at the end of the promotional period.

These loans are only interest-free if they are paid on time. If not, you'll have to start paying interest and at 27.99 percent; it's not cheap. White says it's a common misconception that if you don't pay the loan off that interest is backdated. This is not the case.

"The really important thing is to make sure you can pay it off on time or, if not, have a low-interest account you can transfer the balance to," suggests Cox. Depending on the amount outstanding, this could either be a credit card or a personal loan.

If you're not disciplined, a personal loan may be a better option because you're forced to make repayments and clear the debt in a specified time, unlike a credit card where the debt simply revolves.

From Money Magazine, November 2006