How to Pay Off An Interest Free Loan in Time
Paying Off Your Interest Free Loan Before It Expires
If you’re tempted to sign up for an interest free loan to pay for a purchase, then keep it firmly in mind that you need to repay the amount you borrow before the interest free period expires.
Most interest free deals are advertised as offering customers a loan for the items they want to purchase where the interest free term is between 12 months and 5 years in duration.
When you receive your monthly statement, the payment amount on it will represent the minimum payment due by the due date. This amount will be either 3% of the amount borrowed or $40, whichever amount is higher.
Most people will happily pay this minimum payment amount each month, never considering that it’s not high enough to repay the total balance before the interest free period expires.
In order to repay your interest free loan before it expires and the high interest charges begin adding onto your balance, it’s important to calculate how much you need to pay on your monthly bill to clear that debt.
Calculating Monthly Payments
Let’s assume you bought an item that cost $2,000 on your interest free deal and you took out the contract for 2 years interest free. This means you have 24 monthly payments to make in order to repay the full amount you borrowed.
Before you begin working out how to divide 24 monthly payments into the $2,000 balance you borrowed, it’s important to remember to add the fees and charges that may be applied to your account.
You can find an accurate list of fees and charges listed on your credit contract, or you can call your finance company and ask.
For the purpose of this example, let’s assume your contract charged a $25 establishment fee to set up the loan and also charges $3.95 monthly account fee.
In order to repay the total balance before the interest free term expires, your calculations should look like this:
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Purchase Amount: $2,000
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Interest Free Period: 24 months
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Establishment fee: $25
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Monthly Account Fee: $3.95
$2,000 + $25 (establishment fee) divided by 24 months = $84.38 + $3.95 (monthly fee) = $88.33
The figure at the end ($88.33) is the minimum amount you should be paying each month in order to completely pay off your balance before the interest free period expires. If you pay less than this amount, you risk having a balance outstanding at the end of the term that will attract high interest charges.
Remember that your finance company is under no obligation to tell you or send you anything reminding you that your interest free period on your interest free loan will end, so it’s important that you stay on top of your payment amounts. Keep track of the date you borrowed the funds initially and try to make sure your final payments are received by the finance company before the due date. This way you’ll avoid paying any extra fees, penalties or interest charges.
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