Credit / Interest Free Credit Explained
“There is no such thing as free money” and, yes, you the consumer must pay for interest-free credit.
A company will negotiate a rate with a bank to offer you an interest-free loan. You will notice that in double glazing you will hardly ever see a term beyond 12 months, when, in sofas and soft furnishings, this is up to four or five years.
Why? Because for a 12 month “interest free” agreement, there is anywhere between 7% and 12% commission charged by the bank. When you get to a term of four or five years, it can be nearly 30% that the bank wants.
If your quote is, say, for £10,000, the company will try and get as big a deposit as they can from you, thus limiting the amount of interest they have to pay the bank. Obviously, the interest they pay is passed on to you in the ticket price of the product.
If you are offered interest-free credit, ask for a cash price. They will firmly hold their ground and say the price is exactly the same. Why is this so when surely, if you pay cash, you should be able to negotiate a better deal? The reason is that the Consumer Credit Act states that if they offer you a lower price for cash, you can then demand the same product at the same price on interest-free credit and they will end up having to honour the price and losing money on the contract. So, interest-free credit costs you between 7% and 30%.
You may sign up for a normal interest-bearing loan because you do not have sufficient deposit. For interest-bearing credit, again, it is standard practice within the industry for salesmen and their managers to receive commission on all finance deals. Expect to pay a high rate of interest, often much higher than your bank would charge.
Be aware of the document fee. We know banks do nothing for nothing but the document fees can be inflated by companies or salesmen. A reasonable fee is nothing in excess of £100, but remember it is another £100 onto the cost of what you are purchasing.
