Line of Credit: Using Interest Free Purchases with $8.95 Monthly Servicing Fee

GLO on 15/07/2021 - 19:05

Is this a good way to think about using this line of credit?

Plenty of retailers offer Interest Free for 6m,even up to 60 months for large purchases.

These includes major retail chains. But the question is not about the prices at these merchants.

Its about whether there are other cost effective options, using the following example.

Line of Credit; $10,000.
Monthly service fee $8.95
Term 60 months.

Based on the above example, Annual service fee is $107.40. Over 5 years its $537.

Presuming you use the complete $10K, and pay it off in full by the 60month due date.
The service fee could be viewed as $537 interest for the 5y term. Effectively 1.074% pa interest.

Any other ways to consider?

Financial

Comments

  • John Kimble on 15/07/2021 - 19:29
    +1

    I don't mean to be rude, but what is the point of this topic? I don't quite understand what you are trying to achieve or ask?

    You've only explained how this product works if you pay it off in time (just like a standard credit card), and it is a valid option for people if they do this. I mean we did it with our kitchen renovations and it was great.

    The pitfalls of this product if you don't pay in time, should be well known (ie +20% interest), so it just a matter of making the call if it's right for you (like any loan/credit).

    • peter05 on 16/07/2021 - 11:50

      From my understanding I think that potentially OP is trying to monetise this line of credit, whether it is be reapplying it to another liability like a car loan, or perhaps selling off the equipment purchased with the loan and keeping the money to use for other projects, like renovations etc.

      Not sure how successful it would be but i'd be interested in hearing about any hacks

    • GLO on 16/07/2021 - 13:00

      Hi John,

      My question was to sanity check the way i am looking at it, and it is on the basis that it is paid off in full by the end of the term.

      It looks more attractive than personal loans of the same amount over the same term.

  • dust on 15/07/2021 - 19:30
    -4

    Don't use credit to purchase a depreciating asset.

    • serpserpserp on 15/07/2021 - 20:17
      +2

      What do you think equipment finance is?

    • meowsers on 16/07/2021 - 08:11
      +1

      I love these broad-brush comments from people who have no clue. Why use your own money on any asset if you can structure it and write it off?

    • [Deactivated] on 16/07/2021 - 08:16

      Depends, if the asset can make you more then it is totally fine.

  • Baysew on 15/07/2021 - 20:40

    this line of credit?

    What is this line of credit? have you got a link to a specific offer?

    • avoidfullprice on 15/07/2021 - 22:46
      +1

      I know of Latitude Go, but they don't have pay it off in full after 60 months on the website. They have a minimum repayment of 3% of balance, or $25. So you start paying $300 on first month, $291 next and so on, with a balloon payment of $1,609. Effective interest rate of 2.3%pa if you max out to 10k.

      Anything less you are paying at higher effective interest rate. For example, borrowing 5k means you effectively pay 4.6%pa. At some point, paying with your mortgage redraw/offset is much cheaper. However, this product could be cheaper than personal loan.

      Or alone those lines OP is thinking about maybe?

      • avoidfullprice on 16/07/2021 - 11:00

        Actually, their 60 months option requires equal monthly payment. So with 10k purchase, the equivalent interest rate is close to 2.1%.

        5k purchase and we are looking at close to 4.2% equivalent interest..

        Unsure which product OP saw that allows paying off in full on the last day.

        • GLO on 16/07/2021 - 13:07

          Hi NeutralName,

          You are spot on with the Go Mastercard and equal payments piece.

          Although, i want to see how you calculated the 2.1%.
          My 1.074% pa was a very simplistic calculation (based on paying off the principal in 60 equal parts) but not factoring in the reducing balance (which would increase the effective interest rate after each payment)

          • avoidfullprice on 16/07/2021 - 13:25
            +1

            @GLO: As you said, I assume straight line method. Each month you pay fixed monthly principal, plus interest. I didnt capitalise interests like in a home loan.

            Rerunning the calcs with capitalised interest still suggest to me a 2.X% ish loan with a monthly repayment of at least $175 to give an equivalent total charges of $537

            Edited comments a number of times to reflect my cals

          • avoidfullprice on 17/07/2021 - 08:20
            +1

            @GLO: Found a website that does what my spreadsheet calculated

            https://www.calculator.net/interest-rate-calculator.html?clo…

  • [Deactivated] on 15/07/2021 - 20:58

    I pay $12 a month for a $20k Viridian LOC from CBA. This works out to 0.72% per annum (144/20,000*100)

    • ozbargainsam on 15/07/2021 - 22:54

      Are you sure? If you google 'Viridian loc' it's the first hit. And the first line on the search result summary is 'only charges you interest on the amount you use'.

      $12 is the monthly fee before any interest.

      I had to check because we have a VLOC, too

      • [Deactivated] on 16/07/2021 - 17:41

        Yes I meant I pay $12 a month for the account fee. It's annoying cos the balance is $20k fully paid off but then I get charged $12 a month even if it's not drawn down on

  • tio on 16/07/2021 - 08:34

    It will work like that, IF the LOC is interest free. That's a big IF.

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