Interest-free credit. These three words are often tagged in big, bold letters on cut-price sale signs by retailers of all shapes and sizes – particularly those who offer interest-free credit mattresses and beds. Are you really getting a good deal or really paying the price?
No doubt you’ll have seen a flashy advertising campaign or two, shouting at potential customers to ‘buy now, pay later’ with ‘no deposit needed’. It can be a tempting draw for those who are a little tight on money; but do we really understand how interest-free credit mattresses and beds work and what long-term value we are getting from it, if any?
Interest-free credit is not free credit
This is the first thing to bear in mind. Whilst the cost of repayment for a new bed or sofa does not change over time, the fact is that the total cost of interest has already been front-loaded on to the retail price.
Simply put, there’s no such thing as a free lunch, and no finance service will lend you money without making some profit on it themselves.
How interest free credit actually works
The ins and outs of interest free credit mattresses (IFC) can get quite confusing, so let’s break it down using the Super-Dreamy 1000 pocket sprung mattress as a common example…
Say the mattress is advertised as part of a ‘Bank Holiday Bonkers Deal’ at £1,000 (IFC) – reduced 50% from the original £2,000 RRP. An unbelievable bargain, right?
Well, not exactly.
In truth, the original £2,000 RRP is not a realistic target; it’s an intentionally hyperinflated price. Retail stores can list a product at this price for as little as one week in their quietest outlet before slashing the price in half across all of their stores. The £1,000 reduction is, in fact, the realistic price they expect to sell the product at.
Typically, the retailer makes up to 70% markup – and so would usually expect to sell the mattress for around £600-£800 to cover the cost of production and all of their additional overheads. Typically the retail cost of producing the Super-Dreamy 1000 pocket sprung mattress is around £246.
Our closest comparison: Origins Pocket 1500Experience pure comfort from £525
Choosing the interest-free credit option
Now let’s say a customer chooses to buy the mattress using interest-free credit and agrees a deal with the finance company to pay £1,000 over the course of three years.
Of that £1,000, the finance company pays the retailer £820 and takes £180 (15-20%) as their charge for the credit. This £180 is effectively the hidden cost of credit interest and the finance company’s minimum profit.
Why minimum? Failure to make repayments, or even making one payment late, means the customer is liable to pay up to 30% more in additional charges. In fact, some finance companies may work this missed payment into their metrics for profit margins, counting on a few people missing the payments and being penalised.
Who is losing out?
The purpose of interest-free credit is to remove any doubt in the customer’s mind that they can afford a new luxury item right now, regardless of financial situation or their best judgement.
In reality, the total price the customer agrees to pay is considerably more expensive than it should be with the hidden cost of credit factored in, so you end up investing in a deal that isn’t a ‘bonkers bargain’ at all.
In the above example, customers who take the credit for financial reasons are paying £180 (15-20%) straight away on top of what they should be paying. Because the cost of interest is effectively hidden, the customer doesn’t realise when they are being over-charged.
Even worse than that, customers who choose to pay £1,000 upfront to purchase the bed (and therefore do not need IFC) are still being charged for the additional cost of credit – despite the fact that they are buying the bed outright. These people are getting the worst value for money imaginable! Try asking a retailer for a cash discount and we bet there is no such option to remove the finance charge of £180.
This is the same with all interest-free credit offers, whether it’s curtains, kitchens, bathrooms, the list goes on. It all boils down to a simple sales tactic, where the deal is often more appealing than real value for money or quality of the product.
Different by design
We’ve been approached several times by finance companies in the past to offer interest-free credit deals – but we have refused every time because it does not offer our customers value for money. At John Ryan By Design you will be dealing with us and only us, no third party creditors or suppliers adding to the cost.
Rather than regurgitating all the typical sales mumbo jumbo, our Outlet section offers immediate discounts to customers with no credit agreements necessary. All costs are upfront, nothing hidden, and there’s no need to have any risk tied up with your new bed.
Even if there’s nothing that tickles your fancy, if you’re in the market for a new bed then we highly recommend that you shop around independent retailers who don’t offer interest-free credit because the price you pay will likely be closer to the price it should be.
We don’t offer or use interest-free credit companies. We do offer our Outlet models which would be a better use of your hard-earned cash rather than rely on interest-free credit which you will inevitably pay through the nose for.
Why not call our small friendly team who can help provide recommendations based on your budget on 0161 437 4419?