With Christmas bells already ringing, families are buzzing with ideas on just what they want this season.
It is no secret that this is the time of the year when people toss their old furniture out and replace them; the time mom gets that new piece of equipment her kitchen could not go another year without, and dad, well he gets what mom wants.
The reality is that funds are often too tight for many people as they are stretched to partake in the festivities and purchase gifts for their loved ones. The wants abound, however, and it is quite customary for consumers to look to find ways to “afford Christmas.”
At the same time, countless items come with tags like “nothing down”, “interest free payment” and “the best plan for you!” The temptation to take these “unbeatable deals” cannot be underestimated.
Why does everything suddenly seem more attainable? Businesses have already prepared for an increase in the volume of sales at this time and, consequently are intensifying their advertising efforts.
Consumers everywhere will be encouraged to immerse into several credit arrangements. From businesses’ lists of ways to “help you,” you may find yourself considering a hire purchase arrangement that may turn out to be more a burden than an easy-pay plan.
Hire purchase is probably the most common way of paying for high ticket items like cars, furniture, household equipment and computers. Like any credit deal, it can have its pitfalls and you need to think carefully before committing.
With hire purchase you can take home and use a product while you pay it off over time and that often is the catch for consumers. It can seem like an easy way to pay when you haven’t got the money upfront – especially if it’s interest-free for a while.
What may surprise you is how much it costs to do so. You may find that the total you are paying is way more than if you paid in cash, took a loan or saved up. The question which needs to be asked when you buy on credit is, do you really understand what the rate of interest is that you are paying?
Managing Hire Purchase
Hire purchase can be a good option if you treat it with care. Always ask the retailer to tell you all the fees and charges over the full repayment period. They should give you a single, total dollar amount of what it will cost you.
If the deal offers zero percent interest, ask what the interest rate will be on any amount still owing at the end of the interest-free period. Do compare the charges and fees with the price of what you are buying as they can amount to more than the interest you would pay on a different sort of loan or your credit card.
It is wise to only take up a zero percent interest hire purchase agreement if you’re sure you can repay most, if not all, of the debt in the interest-free period. If you can’t pay off the total quickly, these deals can turn out to be very expensive.
Avoid taking on several hire purchase deals at once. It can be hard to service several debts at the same time and the risk of not paying the full amount within the interest-free period increases.
Take your time to decide. As long as you take the product, you will still have to find a way to pay for the purchases you made.
Know Your Options
Generally, the things people buy on hire purchase, like appliances for example, are said to be ‘value losers’ because once bought, their value goes down. You need to ask yourself: could you delay your purchase, put money aside each month and avoid going into debt?
If you are sure you want to buy an item on credit you have several options and sometimes hire purchase isn’t the best one. Banks, credit unions, building societies and finance companies all offer personal loans.
Find The Best Interest Rate
Interest rates vary greatly. Personal loans and credit cards charge around 12-20% interest. Store cards from national chain stores charge interest as high as 36% a year. With that sort of extra cost, it pays to look around for the best deal.
The temptation is always to pay it off over a longer term but this adds more to the overall cost. Put simply, a $200,000 purchase over three years could cost you around $416,000.
Check the fees and charges
Most hire purchase agreements have a range of charges and fees. They might be bundled into the debt you have with the retailer so you may not notice them. You could be paying establishment and account fees, even on an interest-free deal.
The retailer may insist you commit to a repayment insurance premium which generally means that if you die the lender will be paid the full amount you owe by the insurer. And if you lose your income through no fault of your own (e.g. accident, illness, redundancy) your repayments will be covered for a period of time specified in the agreement. Paying the premium will add even more to the amount you owe and it may be an unnecessary cost.
It is very important to remember that it is hire, not purchase. The good is legally yours only when the last dollar owed is paid. In effect, you actually pay to hire the goods, until the bill is cleared. Cash is a hard earned; you work too hard to be tied down in debt from purchases you need not have. Be careful this season: don’t let hire purchase this season cost you next year’s Christmas.