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November 2007 - Interest-free loan bears interest when not paid on due date

Interest-free loan bears interest when not paid on due date

☳ by Adam Aspilla

Money lenders’ primary source of income come from the interest on the money they lend to borrowers. As part of their marketing approach, they offer free-interest loan and no payment for a year usually on funds used to purchase items like household furniture and appliances.


With no interest and no payment for a year, it is enticing to purchase new furniture and appliances although your furniture and appliances are still decent looking. No interest, no payment for a year is really good but if you do not know the fine prints on the credit agreement, you would be distressed should you fail to pay the interest-free loan amount on the due date.


When your motivation to purchase items is the free interest and no payment offer, in most cases your monthly payment for the new purchase is not within your budget. As a consequence, you would not be able to pay the free-interest loan amount when it is due – you are on default.


When default occurs, the fine prints on the credit agreement concerning interest rate on the outstanding balance would kick in. Unfortunately, the interest usually is retroactive from the date of purchase and not from the date of your default. Moreover, interest rate is above prime by three or more points as lenders on this type of loans are secondary financiers.


Should this happen to you, the saving you envisioned in term of interest at the time of your purchase is gone. It evaporates like a vapor. When you calculate the accumulated high interest for one year on total amount of purchase without any payment made, you would be depressed and wished you did not make the purchase.


A caller who did not pay on the due date the interest- free loan asked if she could dispute the interest charges on the loan for according to her it was not explained to her at the time of the purchase. She claimed that interest rate should start only at the date of default.


I told her to read the fine prints of the credit agreement and if the interest provision is there, you may dispute it but it is your burden to prove that the seller made a misrepresentation at the time of your purchase.


Making a spur of the moment purchase is not good for your financial health for it is usually outside of your budget. Regardless of how much savings you could make when you make a purchase on credit, do not succumb to the temptation to buy. Otherwise, when you are on default you would be paying unnecessary interest.


Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.