Terms and conditions apply; the most commonly read sentences in the world today, yet ignored every single time. But who is to blame? Who wants to read all that “unnecessary” information when signing up for something?
Ain’t nobody got time for that!
When it comes to the world of personal finance though, not reading the terms and conditions could lead to some serious problems. 0% interest instalment plans on your credit card are the perfect example. It has become so affordable to purchase that massive LED TV you have been eyeing… and that too without interest! Think again.
All major banks in Pakistan now offer 0% interest instalment plans at their partner retailers through their leading credit cards – usually restricted to Gold, Platinum and above. The list of available products are on every bank’s website. You simply select the product you would like to buy, decide the number of months you would like to pay it over, call your bank’s helpline and your product is delivered to your doorstep within a few days! Subsequently the cost of your purchase is included in your minimum monthly payment on your credit card bill. It is really this simple! Well, not so fast.
Here’s a few things you need to know before you jump into one of these 0% interest instalment plans.
Tenures vary depending on the bank and product
Depending on your bank and your product, 0% interest is only available on tenures ranging from 3, 6 or 12 months. It is possible to split payments over longer tenures up to 60 months, but then you would be charged interest anywhere between 15 to 25% APR. The longer the tenure, the more interest you pay. Bank Al Falah offers 0% interest up to 18 months on Apple products, but only 12 months on Panasonic products. On the other hand, Faysal Bank offers only 3 – 6 months interest free payments on Samsung products. Other banks may offer different tenures for different products – go to your bank’s website for further details.
The effect on your credit limit
One of the most common unknowns about these instalments plans is that the full cost of your purchase is deducted from your credit limit. For example, if you purchase a TV worth Rs 60,000 through a 12 month 0% instalment plan and your credit limit is Rs 100,000, your remaining credit limit would be Rs 40,000 post the date of your purchase, even though the full amount actually has not been charged to your card. As you pay your monthly instalments of Rs 5,000, your credit limit is slowly recovered. These instalment plans are not an extension of your credit limit! So, if you decide to buy an expensive product, you could end up exhausting your credit limit for the tenure and face inconvenience in managing other expenses through your credit card, especially in the first few months.
No interest, no reward
Another downside to these plans is that you miss out on other reward schemes. Since banks are already providing you an additional facility of 0% interest, any money spent under these schemes are not eligible for reward points/miles. So you might think buying an expensive product through a 0% instalment plan would provide you with plenty of reward points – sadly, you would be wrong. Banks are in the money making business and since they already lose out by providing you interest free credit, they make up for it by withholding their reward points.
Are they really “free”?
Speaking of money making, these interest free plans aren’t exactly free. There’s always an administrative or processing fee to start off with, which ranges anywhere between 1.5% to 2.5% of the price of your purchase or a nominal amount of Rs. 300 to 500, whichever is higher. That might be a negligible amount to pay for the convenience, but you should also consider the total price being charged too. For example, if you buy an iPhone 7 32GB from Bank Al Falah on 0% interest, the total price is Rs 87,400. If you were to buy this from a retailer directly, my sources tell me you could buy it for as less as Rs 75,000. So, even though you are not being charged “interest”, you are being charged a higher price for the product. The price differences may not be as large for other products but it is always worth checking with retailers directly before you decide to buy.
Early or missed payments and cancellations
Lastly, once you commit to a payment plan, you must stick to it. You are not able to cancel your card for whatever reason while your payment plan is running, and paying off your balance early will cost you an additional fee. This can be around 5% of your balance amount or a nominal amount of around Rs 1,000, whichever is higher. If you miss your minimum monthly payment at any time, you are automatically taken out of the 0% interest scheme and your balance amount is subject to interest from that month onwards.
As any other personal finance decision, it is imperative to consider all these factors before you sign up for one of these payment plans. You must prioritize your regular monthly expenses and not spoil your budget by buying a product that you cannot afford. Making a purchase that goes beyond your financial means always leads to trouble. Instalment plans can be expensive, commitments and those who abuse these schemes may eventually be rolling in unaffordable debt and a poor credit rating. If you use your credit card for running expenses such as groceries and utility bills and are paying your credit card off in full every month, consider the impact the installment plan would have on your budget.
If the product you would like to purchase costs more than 25% of your credit limit, you are much better off saving up for it rather than putting yourself at risk of exposure to interest. The best way to go about it is to only buy that product on a 0% interest instalment plan that you would be able to afford from your savings anyway. Here’s what I mean: let’s say you want to buy the iPhone 7 for the aforementioned Rs 87,400. If you took a 12 month plan, you would pay Rs 7,283 every month, interest free. If you had the money saved up for this purpose, you could instead invest it in a fixed deposit for 12 months, generating 5% interest. This way, you get to make your purchase interest free and on manageable instalments, and actually earn around Rs. 4,370 while doing so!