Iit sleek lines, flawless picture and wide, wide screen make it oh so appealing. It's that plasma-screen television you've been dreaming about and despite the fact you don't have the $5000 it costs you could take it home today.

Buy it with store finance and you won't even pay interest for the first 12 months, the shop assistant tells you.

Sound too good to be true? That's because it probably is.
Increasingly, department stores, electrical and furniture stores are using interest-free credit packages to clinch a sale. But hidden in the fine print is a financial disaster.

Interest-free loans aren't interest free. They offer a period without interest usually 12 or 24 months after which you will pay through your eyeteeth.

When the honeymoon is over

"You should view it as a loan with a honeymoon period, but when the interest rates do kick in they are horrendous," says Catherine Wolthuizen from the Australian Consumers Association.
They can leap to as high as 27.5 per cent more than double the average credit card rate.
Even worse, the minimum payments set down during the interest-free period are not usually enough to pay off the loan before interest starts being calculated.

"You can be quite happily paying your minimum payment but not realising that you are working your way towards a substantial debt," Wolthuizen said.

Figures calculated by Cannex (see table) reveal that if you pay off only half of that $5000 plasma within the interest-free period, at 27.5 per cent, you will pay more than $200 extra if the remainder takes you six months to pay off, and will pay almost $400 extra if it takes you 12 months.

Another pitfall for the uninitiated can be a clause in the fine print that invokes the immediate calculation of interest if a monthly minimum payment is missed, sending your total cost skyrocketing.

Also, interest-free loans often offer a facility to redraw on the loan, whether that's through a card or a system that allows you to access the loan for any additional purchases within the store. This can prove a costly temptation, with interest calculated immediately on new purchases.

Better ways to buy on credit

Wolthuizen suggests that to make the most out of interest-free loans you should be realistic about the likelihood of repaying the loan within the interest-free period.

Quite often these deals are offered on large ticket items so you may be hard pressed to repay the $6000 for your whitegoods package in just 12 months.

"Some people would struggle actually, most people would struggle to pay that back in that period of time," Wolthuizen says.

In most cases, she says, it is cheaper to pay for the product with a straight personal loan. This offers a fixed payment over a fixed period at a much lower rate than that offered under the interest-free model. The personal loan is for a designated period so you are able to determine the exact amount the product will cost you.

And in some cases even using a low-rate credit card may prove better value than the interest-free loan. A low-rate credit card will charge around 11 per cent interest, which is half that of the most common interest-free loans. But you need to be disciplined and ensure that you pay off the credit card within a reasonable period to ensure that you do not end up paying interest for years to come.

The interest-free verdict

Ultimately, interest-free loans do offer an extraordinarily good deal if you have the means and the discipline to pay off your purchase within the free period.

"In essence it is offering credit without fees so long as you make sure you pay it off in time it can provide a saving," Wolthuizen says.

But Cannex managing director Andrew Willink says it is misleading to build the perception that you are borrowing at zero interest. "The cost of the borrowing has been factored into the cost of the goods," he says. "The simple fact is you don't get money for nothing and the store has factored in whatever it is costing it to provide you with that credit."

Case Study

For Steve Pearce and his partner Gita, an impending visitor with nowhere to sleep presented a problem.

To make matters worse, it was Christmas time and the budget was tight.
So the couple took advantage of a 12-month interest-free loan to buy a $1300 sofa bed from Freedom Furniture.

It seemed like a great deal they could have the sofa in time for their guest but make it through the yuletide period without having yet another expense.

"Things were going swimmingly we got a statement each month and made our minimum payment," says Pearce, a 34-year-old radio producer.
"But then we actually sat down and worked out that if we continued to make the minimum payment we wouldn't pay it off before the interest kicked in."

The loan, through AGC, was at a rate of 27.5 per cent after the interest-free period ran out.

"It was a bit of a stretch, but with about six months to go we made sure that we increased our payments so that we could pay it off in time.
"We didn't want to start paying that kind of interest. Looking back on it I'm glad we sat down and did the maths."