LOUISE FAIRSAVE: Careful with hire purchase
THE PERIOD encompassing Independence and Christmas is one when most Barbadians would wish to have their homes at their best for visitors from overseas and for the Christmas Day feast. It’s also when merchants are carefully sharpening their hire purchase tools.
With the availability of hire purchase, many homes can be adequately outfitted for this special period. More than anything else, hire purchase provides greater affordability in terms of being able to meet the periodic payments.
Yet it is useful to consider the relative cost of the hire purchase service. For some homeowners, money sense goes out the window completely during the festive season. They then scramble to rationalise how much they have committed themselves to pay.
Let us consider a couple of examples of hire purchase. In our first case, the appliance is offered for a cash price of $1 999. Alternately, a down payment of $314 is required and then 18 monthly instalments of $113.
For starters, we will accept that the hire purchase option is a valuable service. So, it is expected that the payment over time will cost more. This higher cost amounts to $2 348 ($314 + 18 times $113).
The difference between the cash purchase and the hire purchase is $349 ($2 348 – $1 999), which is about 12 per cent simple interest on $1 999 for an 18-month period. This interest level seems high but not exorbitant.
Yet, it is important to recognise that as instalments are made on the debt, the balance owing reduces. The full $1 999 does not remain outstanding for the entire 18 months. So, if the interest rate is recomputed using this reducing balance effect, it works out at about 24 per cent, a significant number to reconsider.
Yet, hire purchase, even at that relatively high financing cost, may be justifiable where the inflation rate is high.
Let us look at another example. The cash price of the appliance is $1 258. The hire purchase arrangement involves 24 monthly instalments of $82.33 each. The cash outlay for the hire purchase option is 24 times $82.33 or $1 975.92.
The difference between the cash purchase and the hire purchase is $717.92. In simple interest terms, this works out to be about 28 per cent interest on the full $1 258 for a two-year period. The recomputed interest rate based on the reducing balance effect is of the order of 48 per cent – an astounding percentage.
As an additional caution, you should note that merchants are typically hesitant to disclose the finance charge in a hire purchase agreement. You may just have to make a computation of your own. In addition, please check if additional charges such as delivery and insurance are included.
When you consider how difficult it may be for you to earn upwards of 12 per cent on any of your various investments, you may more rationally review the hire purchase option.
If it is at all possible to delay your purchase so you can save part or all the cash payment needed, you will be better off financially in the long run.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email LouiseFairsave@nationnews.com.
This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.