Interest free credit - How does it work?

iolanthe07

the cost of a sofa is the same if you take free credit or you don't

Not necessarily. I negotiated a substantial discount by offering cash. Had I used DFS credit, there would have been no discount.

opinions4u

Hazel_ wrote: »

I used DFS as an example as I saw an Ad on the TV.

As for DFS. I don't remember a time when they have never had a sale.

At any one time around 80% of their stuff is NOT in a sale.

The sale gets you in. Your wife then "falls in love" with a non-discounted sofa. 4 years later the credit is repaid, the sofa is knackered and the cycle starts again!

chanz4

When I used to offer finance via hsbc, they used to have the product at a lower price from us.

SeanG79

There is no such thing as free money and the banks/finance houses do NOT simply gamble and hope to make money if people fail to pay...

0% APR finance on any finance program, be it cars or sofa's or anything else all works on a system of "blind discounting". the bank/finance house will pay the retailer the amount less the interest charges, an example would be a £1200 sofa over 1 year, the customer pays £100 x 12 monthly payments, the bank though pay the retailer £1104 (the actual sales price of the sofa after the blind discount), and invoice the retailer the difference (£96) which is the interest portion of the finance.

Cornucopia

Or even simpler:

Buy a sofa on credit at £1000. DFS pays the Bank £100 fee for providing the credit, as part of their costs of doing business.

There is no such thing as free credit from a retailer's perspective. The only question is whether it is possible to extract the notional cost of credit as a discount if you don't take it.

[Deleted User]

CLAPTON wrote: »

the cost of a sofa is the same if you take free credit or you don't

all the costs (for all companies in all circumstances) are 'front loaded'; how can that not be so?

the point is that dfs are more expensive than they might be if they didnt offer 4 years free credit,the "free"finance has to be paid for some how

Brains64

CLAPTON wrote: »

unlikely on a four year deal : probably true for short 6 month or even 1 year deals

probably subsidised by DFS as a cost of doing business

Yes, good point and it's worth noting that they would never offer 4 year interest free credit for a loan amount that would be easily paid off within that time even by the least well off, they will offer 6 months free for a relatively smaller amount but again, big enough to ensure that it would take more than 6 months to repay.

The best way to describe the business gamble they take here is that it's a little bit like when you see these 'first month free' trial promotions, they offer you the chance to try something out for a month with the option of canceling if you want which of course is your prerogative and you'll have had something for nothing which is great.

However, thinking about it from the point of view of the company offering the deal, they wouldn't make any money if everyone canceled before the end of the free trial period would they??, so they are gambling on most people forgetting to cancel, missing the deadline, not being sure how to cancel or liking the product enough to keep it...whatever...but it's a business gamble, a gamble they wouldn't take if they weren't sure that most wouldn't cancel within the time.

Same principle with interest free periods, they would not offer it unless they were sure most wouldn't be able to finish repaying within that free time.

Cornucopia

I disagree with this. The DFS offer is what it purports to be.

I bought a sofabed there a few years ago. £399 to pay - £16 per month, interest free over 2 years - the salesman did persuade me to go for 2 years rather than 3 or 4.

Just like any loan, if you fail to make the payments, there will be penalties, but there is no suggestion that DFS is any worse than any other lender. My loan was administered by Lloyds (Black Horse Finance).

UsetheFORCE

Cornucopia wrote: »

I disagree with this. The DFS offer is what it purports to be.

I bought a sofabed there a few years ago. £399 to pay - £16 per month, interest free over 2 years - the salesman did persuade me to go for 2 years rather than 3 or 4.

Just like any loan, if you fail to make the payments, there will be penalties, but there is no suggestion that DFS is any worse than any other lender. My loan was administered by Lloyds (Black Horse Finance).

Which bit do you disagree with???

fozmcfc

In my experience of these sort of deals, even though they are at 0%, there is usually a set up fee, or a final payment fee, and/or a fee if you pay in a certain way i.e not by direct debit/bank transfer.

Of course if you don't pay before the date the 0% expires then you get charged deffered interest i.e. interest from the day you bought it.

Roughly 6 years ago, I got a £700 TV with 0% for IIRC 9 months, but there was a set up fee of about £25. So even if I had paid it within the 9 months, I still would have paid £725, but still not too bad.

Unfortunately it was in my bad spending days and I ended up not paying it off with the 0% period and ended up paying it off over 4 years at a huge APR and it cost me nearer to £1300.

There is one thing that does catch a lot of people out and that is they think they have longer to pay it, than they do. So for instance on a 12 month 0% deal, they apply to buy it on the 1st Sept and credit is agreed on the 3rd Sept.

They take delivery on the 10th September, many people think they have until the 10th September the following year to pay it off.

However, it is the date that either they applied for or were accepted for credit that is the repayment date. Many people go to pay on the 7th or 8th and then get hit with the news and most companies won't budge.

Even paying it on the day it runs out, isn't advisable. I have seen people say on these forums, the company concerned has said it needs to clear in their account, before payment is consider accepted.

As ever always read through the T&C's in particular any charges and terms about when the 0% runs out.