No Interest - No Worries?!?! (from Today Tonight)

Buy now, and pay later - no interest, no worries. They're the innocent promises of the smiling salesperson. And a temptation that we used to try to avoid.

But now, it's a way of buying that Australians are turning to in their hundreds and thousands. And while the horror stories persist, can it really be a smart way to buy?

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Interest free purchases are everywhere - be it your car, your fridge, the flat-screen or lounge - and Australians love a deferred payment.

Skander Malcolm manages Retail Solutions at GE Capital, the largest provider of interest free purchase plans in Australia.

"In the last three years alone, we have done more than $2.2 million interest free transactions," Skander said.

"There are two main types: instalment interest free, that might be 3 years interest fee, so you pay fixed instalments to pay it off over that time frame," Skander said.

"And then the other type is buy now, pay later. So, it might be put a deposit down and you don't pay anything for twelve months and then you pay it all off in one go," he added.

Isabella and her brother Jamison are growing up in a world which runs on the promise of buy now, pay later.

Their mum, Caroline Birks, has practically furnished the house interest free.

"We've been able to buy a computer, a fridge and the big screen TV," Caroline said.

Caroline's family exemplify the 80% of interest free shoppers who never pay interest, but what about the other 20%?

Finance columnist for the Financial Review, Nicole Pederson McKinnon, warns of the dangers associated with interest free purchases.

"Interest free promotions sound tremendous don't they, but there are so many pitfalls in there, they are designed to trip you up," Nicole said.

"It is really important to remember that if you have a card with a minimum monthly repayment, those repayments are set so low that by the end of the period, you won't have paid off that debt at which point you will be slugged with an interest rate which might be 30 per cent - eye watering," she added.

Simone smith bought a $1499 couch interest free for six months. But she failed to repay the full amount in time and that's when the interest kicked in.

"It was around about 39 per cent," Simone said.

Simone wound up paying $5,000 for her $1,500 couch.

In this circumstance the message is clear - don't pay up before the interest free period is over and you'll get burned.

It's also clear that interest free purchases help retailers sell their goods - and retailers pay companies like GE to finance the interest free purchase plans.

"We make our money charging the retailer and the retailer is happy to do that because it helps them sell their goods," Skander said.

So do retailers inflate prices to cover this expense?

Retailing giant Gerry Harvey: "No, because there's a thing called the incremental dollar. So, if you're doing business and you sell a million dollars worth of products, you make so much money at that margin. Now, say you sell another million dollars worth of products and you make a lesser margin on it, it's still very profitable. The incremental amount becomes the profit," he explained.

"You know, it's like 4% or something of people that buy on interest free, that get into trouble repaying it. So the other 96% repay, 70%renew, they come back as repeat customers all the time," Gerry said.

So, how does interest free stack up against other credit options? If you pay off the principle in 36 months at $145 per month, $5,000 worth of goods on GE's Master Card will cost you $5,167.20, after fees.

If you pay $100 a month over 52 months, it will cost you $5,487.11, which is still $1400 cheaper than a personal loan for $5,000, paying $175.79 over 36 months.

And it's almost $2,000 cheaper than the same amount spent on a regular credit card, paying $145 over 51 months.

"Well interest free is the smartest way to borrow. Particularly as the base rates go up, it gets smarter and smarter because the alternative is that people put it on their mortgages and stuff like that, and that just get's more expensive," Skander said.

So interest free purchases can work, and do for a number of people. The key is to pay off your purchase in the right amount of time.

"Pay it off before the period ends or you will lose," Nicole warned.