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Interest Free Credit - Pros and Cons

Are Debt Problems and Financial Difficulties a Price Worth Paying?

Jan 3, 2009 Asa Ghaffar

Buying on interest-free credit allows someone to take advantage of sale prices during the credit crunch. What about financial difficulties and debt problems though?

Attractive sale offers abound so that interest-free TV or interest-free laptop deal has never appeared more enticing. Interest-free credit is a means of buying goods without having to pay upfront. Whilst most sources of credit involve a cost of borrowing, this can be avoided. It is often used by retailers to boost sales during an economic downturn.

Advantages of Interest-Free Credit

Sale prices. It might not be possible to purchase an item that is desperately needed. This means that the item has to be bought later on at a less attractive price.
No interest charged. No additional interest is added to this variety of hire purchase agreement throughout the term of the offer. Many other forms of credit accrue interest of at least 10% APR.
Cheaper than buying on a credit card. Whilst some cards offer interest-free credit for 12 months many charge a vastly higher rate of APR once any special offer has elapsed.
Cheaper than a loan. Whilst a number of people take out a loan to perform home improvements, there is no additional cost to any borrowing. Combined with a sale price, this can potentially save the buyer hundreds of pounds on necessary purchases.

Disadvantages of Interest-Free Credit

Good credit is required. Whilst people can get a deal on a car when bad credit exists, it is unlikely that many offers will be available to someone with adverse credit, CCJs, a loan default or a history of missed payments.
Unnecessary purchases. It encourages people to buy things that they don't really need. Nobody can predict the future, especially during a recession. Should the borrower lose their job it could create financial difficulties and debt problems.
The item isn't owned until the last repayment has been made. A hire purchase agreement gives the lender the opportunity to recover an item where the borrower has defaulted. When less than a third of payments have been made, it is legally possible to 'snatch back' the item provided there is no forced entry to a property.
Creditor harassment. Should a borrower have difficulties keeping up with repayments this may result in creditor harassment.

Deciding whether interest-free credit is the right option depends largely on affordability and whether a genuine need exists. If already struggling with financial difficulties, stay away from hire purchase agreements. It is important to be sure that something is genuinely needed before buying anything on credit.

Those interested in Finance may also wish to find out how to deal with hire purchase default and how to avoid mortgage arrears. Those already struggling with financial difficulties and debt problems should look at debt management plans & controlling finances.

The copyright of the article Interest Free Credit - Pros and Cons in Personal Budgeting/Finance is owned by Asa Ghaffar. Permission to republish Interest Free Credit - Pros and Cons in print or online must be granted by the author in writing.