"Interest-free" or "Buy Now Pay Later" agreements
Whereas some major department stores do interest-free agreements that are exactly that - 6 to 12 months agreements where the payments are just the balance divided by the number of payments, for example a £180 purchase, paid by a 10% deposit of £18, and 12 monthly instalments of £13.50, and some car manufacturers do the same over 24 to 26 months, in some sectors of the market things are done differently.
"Interest Free" credit
It has long been a finance company practice in the retail sectors (furniture or electrical goods) to couch interest-free offers within interest-bearing agreements. The advantage for them of this is that, in the event of default, they can recover a higher level of costs, which would be impossible if the agreement was interest-free. The Consumer Credit Act 1974 rules on default prevent the default interest rate being any higher than the normal rate charged in the agreement. What these sort of agreements show is a chargeable credit agreement having a fairly high APR (up to around 39.9%) and usually bearing an inked stamp or printed box whist states that no interest will be charged if the agreement is fully paid off before a specified date.
A few years ago, Sue Kielty, a consumer advisor at Essex, did a Radio 4 programme, called Inside Money, campaigning for finance companies to warn people that they were coming to the end of their interest-free period and to give them a mechanism to repay on time. As a result, the Finance & Leasing Association (FLA) agreed to include in its code of practice such a requirement.
Unfortunately, the FLA code is only binding on its members, and there are one or two lenders in the interest-free market who are not members, such as those based in Northern Ireland.
Strictly therefore, there is no legal requirement on a non-member to notify a consumer that he or she is coming to the end of the interest-free period.
However, sometimes sales representatives may state that there will be a warning in which case consumers are protected as follows:
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The credit agreement itself is a debtor-creditor-supplier agreement in the terms of the Consumer Credit Act 1974 and may be a hire-purchase agreement (this will be mentioned in the heading of the agreement).
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If it is hire-purchase, then the sales representative is deemed to be the agent of the creditor. If it is not, then Section 56 of the above Act applies, and again the sales representative is deemed to be the agent of the creditor.
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It follows that any statement made by the agent is binding on the creditor.
The consumer can therefore offer the interest-free balance and rely on the finance company’s breach, as provided by the representative’s statement.
"Buy Now, Pay Later" agreements
While some agreements are sold as "interest-free" deals, as covered above, others, particularly home improvement facilities, offer a long term agreement but the first 3-12 months are not to be paid.
If you are are entering into such an agreement, you need to be certain that you understand what is going on before you sign. There are two likely scenarios for such agreements:
- interest is not added during the non-payment period, so the balance at the time when payments commence is the same as when the agreement started
- interest is added during the non-payment, so the balance at the time when payments commence is somewhat higher than the starting value, particularly because no payments have been made to offset the charges..
The length of the agreement may also be affected by such a non-payment period, and thus the total cost of the loan over its whole length.
My advice is to be very wary of such an offer. If it looks too good to be true, then it probably is!!
This page was last updated on 02/11/07 (c) Bob Imrie