You may have heard the phrase "there's no such thing as a free lunch" and when it comes to interest-free purchase plans, or "buy now pay later", there's nothing that rings truer.

While these plans may sound enticing, any merchant extending credit to its customers and charging no interest - especially with interest rates as high as they are - is going to be trying to recover the cost somehow.

It may be through a higher priced item, fees and charges or exorbitant interest charges once the interest-free period ends.

The way the "offer" is extended will determine the way the store or service provider makes their money.

A Choice guide to store finance deals found them to be lucrative for finance companies, profitable for retailers but a "real mixed bag" for consumers. Interest-free deals can be just that. But fees can apply - and up to 28 per cent interest if you don't pay in time.

Charge cards

It is common for a store offering interest-free periods on its goods to extend to customers a credit card, which may or may not carry an interest-free period.

If it is a "store" card, then check that the interest rate is not more than average credit card rates. High rates of interest - 27 per cent or more - will generally kick in at the end of any interest-free period.

While that should be an incentive to repay the loan within the set period, what often happens is customers receive letters in the mail encouraging them to use the card - the limit on which will be considerably higher than the item being purchased.

You need to know that the interest-free period doesn't always apply to new purchases made on the card and so the interest charge on these may be at the exorbitant 27 per cent.

Credit cards are always harder to cancel than get and even if you never use it there could be fees involved.

"Interest free does not mean fees and charges free," says Carolyn Bond, joint chief executive of the Consumer Action Law Centre.

Instalments

In this case customers will get the goods immediately and the credit provider calculates the regular monthly payments required to clear the loan and fees within the interest-free period.

Choice says the fees and interest rates are similar to "buy now, pay later" deals where customers may be charged an establishment fee and a monthly fee.

Repaying the full amount borrowed (including fees) any time within that period, either in a lump sum or with smaller repayments, avoids interest. High interest applies for balances repaid after the interest-free period.

Traps to watch include making repayments that are high enough to actually repay the loan in the required time. The regular monthly payments to clear the loan on time and avoid interest are more than the "minimum payment due" shown on your statement - the minimum may be just the amount you have to pay to avoid a late payment fee (up to $30).

Some providers require a deposit. It may be that if one third of the price has to be made upfront, the other two-thirds have to be repaid in equal instalments during the interest-free period, before the interest at 21.9 per cent a year rate kicks in.

Costly goods

Bond says that even if people do pay for the goods within the interest-free period and "beat the system" it is highly likely they were paying more for the goods than might have been otherwise.

"You never see a tag on a fridge saying 'pay $900 interest free or $800 cash'. A store has to pay the lender somehow and often it is through higher prices," she says.

It is not just stores that recover their costs this way. Major household installation services, such as those for carpets or blinds, work the same way.

If they base a quote on an interest-free deal it will almost certainly be higher than if you didn't take the interest-free offer.

Bond says people should always ask for a straight quote first and then ask for the same quote on interest-free terms.

Be disciplined

Interest-free deals are not set up so that customers will receive a statement saying how much they owe monthly. It is up to individuals to monitor their repayments - as regular instalments or a lump sum towards the end of the interest-free period.

This could take discipline and a bit of planning.

While someone's intentions might be to make regular payments it is easy to find something else to spend the money on along the way. Similarly, be certain that the money that is going to be owing at the end of a set period is readily available - otherwise the high interest rate will apply on any balance.

PAY NOW AND PAY LESS
2500 PURCHASE OPTIONS   WHAT YOU CAN DO         
Pay cash                        Pay cash price: $2500           0
'Buy now, pay later'            Repay within 18 months          73
interest-free finance   Repay 80% within 18 months              246
over 18 months**                and repay balance 1 year later  
                        Repay 60% within 18 months              386
                        and repay balance 1 year later  
Interest-free instalments       Repay within 2 years            96
over 2 years**          Only pay minimum amount for             136
                        months 19-24 then return to     
                        original repayments     
Credit card             10% pa card, repaying           $115            
                        per month for 2 years 260       
                        16% pa card, repaying $122              424
                        per month for 2 years   
* Cost of credit includes fees, any interest paid, and/or lease payments.               
** Assumes $25 establishment fee, $2.95 monthly fee and 27.99% pa interest rate.                
Source: Choice