You have the cash to pay for the fridge but looking to your spouse you think out loud, "If it doesn't cost us anything, why not take the 12 months interest free?" As the discussion proceeds further the sales representative offers a $50 discount if you pay cash. You think "for $50 I think I would rather have the cash for 12 months". Rather than saving $50 immediately you opt for the 12 months interest free; 12 equal payments for the next year.
The fridge is delivered, it fits perfectly and looks great and over the next couple of weeks the usefulness of the ice maker in the door exceeds your expectations. You set a reminder in your calendar to make the first of the 12 monthly payments and happily get on with life.
It's not until month 3 that you forget to make the monthly payment and call the finance company to find that you will be charged a disproportionate $35 for being just 1 day late. Only then do you realise that 12 month interest free options aren't all they cracked up to be. Gotcha!
Other issues to consider before choosing the interest fee option:
1. Spending the money you were going to use to pay for your "interest free" purchase.
2. Paying exorbitant interest rates if you don't have the cash to pay out the loan at the end of the interest free period.
3. The extra hassle of having to pay yet another bill – clutters your life with unimportant nuisance tasks.
4. Other clauses – there are usually other clauses within the contacts that can also catch you out.
And it's not just Interest Free purchases…
These "Gotcha" experiences aren't limited to interest free purchases but to many other contracts we enter into in our daily lives, including mobile phone plans, internet contracts and bank fees.
I was recently caught by the "Gotcha" experience when I received a massive internet bill because I significantly exceeded my monthly download limit whilst setting up a new website.
Capped mobile phone plans are the other classic example. I suspect it is when callers exceed their caps that the telecommunication companies make some real profit. I base this suspicion of the fact that sales representatives get a greater commission where the customer exceeds their monthly usage cap. Be careful choosing a low cap and then exceeding it as the rate charged on calls made over the cap are often exorbitant
Keeping on top of all the various arrangements you have is a real challenge so have a payment system and keep it all as simple as possible. Pay cash, choose pre paid plans and understand the terms and conditions of all the contracts you have in place. Keeping things simple is the best way to avoid the "Gotcha" experience and avoid the bitter pill that is oh so difficult to swallow.
Gavin Martin is a Financial Adviser, Managing Director of Cornerstone Wealth and founder of www.mastermymoney.com.au