Free credit is a loan of contention

SPEND now, pay later. That's the message from the high street's enticing window displays. Retailers are happy to offer credit to their customers, especially when sales are slower than expected. Some packages are great value; others lock buyers in to interest rates as much as three times the base rate for several years. It used to be simple for shoppers: only a fool would take on a loan if they could pay with money. Interest- free credit deals have made the choice harder. Someone who buys a home entertainment system costing pounds 1,000 on a six-month interest-free credit deal will be better off by around pounds 30. This is based on the interest they would earn, after tax, by putting the money in one of the more competitive postal savings accounts.

Interest-free deals, though, are not always straightforward. Some shops use them as a lead-in for their standard, and costly, credit deals. After the interest-free period, often six months, the loan reverts to normal with monthly payments and interest. Store loan rates can be as high as 28.9 per cent, far higher than an overdraft or even a credit card.

Purchasers who use an inter-est-free credit element will sign a loan agreement setting out the monthly payments after the "holiday" and the total cost of credit. If the deal is advertised as interest-free initially, or as "buy now, pay later", the customer must have the option to pay for the goods in full at the end of the interest-free period, and owe nothing more.

Details of the loans themselves should be displayed in stores, including repayment periods, interest rates, deposits and any charge for repayment protection insurance. This charge can add considerably to the cost of borrowing.

Lenders are under no obligation to remind customers that their interest- free period is running out.

The trickiest deals are those requiring shoppers to fill in a direct debit agreement in the store. This starts to work as soon as the interest- free period ends, and less observant borrowers will find themselves tied into a costly loan. Some loan companies write to customers before this happens, but not all are as helpful. Once the interest-paid loan comes into operation, it can be hard to pay it off without incurring penalties.

Currys, for example, offers up to a year's interest-free credit. The standard rate for the store's loans is 29.5 per cent. Customers who go beyond the one-year free-credit period can pay their loans off early, but there will be a "settlement" charge based on the amount of the loan and its term. The settlement figure is not available in store; customers have to ring up for a quote when they decide to repay the loan.

Most high-street stores operate similar policies. Shoppers who buy on credit cards or with an overdraft can pay off the debt whenever they want, without penalties. Most bank loans, like store credit, will have early redemption charges.

Shoppers seduced by interest-free credit also need to ensure they are not paying over the odds for the goods themselves. Under consumer credit law retailers are not allowed to set one price for buying on credit, and another in cash, and call the deal interest-free. They are, of course, free to charge all their customers a price that reflects the cost of offering credit deals. A shop that does not offer credit may have lower prices, or be more willing to give a discount for cash.

"On the high street, you usually find that the interest-free element is built into the price," explains John Patrick, director of the Consumer Credit Trade Association.

"One store may be selling an item for a higher cash price and offering interest-free credit, while another company may be giving a lower price but interest-paid credit deals. You should ask the salesperson to write down what the cost of the credit is."

the knowledge

Shop around for the best-priced goods first, then look into the options for credit. If you have the money, don't bother with interest- free deals.

If you do want to buy on credit look for the best loan deals. If you have savings think about using them before borrowing. If you do borrow, compare personal loans and credit cards with store credit. Remember to allow for payment protection cover, if you need it.

Several credit-card deals cost less than store credit.

To cut the cost of credit, pay a higher deposit and take out a shorter loan. Stores point out the minimum deposit, but putting more down saves interest.

If you take out an interest-free deal make a note to pay off the loan before it becomes interest-paid. If you have phone or on-line banking you may be able to set up an automatic payment months in advance.