Choosing the right payment option can save just as much money as find a bargain on price when shopping for retail items.
We live in a society where many things we own either become obsolete quickly or we want to upgrade them; cars, white goods, furniture and technology to name a few.
When making a purchase, most consumers focus on getting the best price, rather than the best payment option. It is easy to forget that there can be two separate deals: the price of the item and the price of the finance deal.
We are regularly inundated with special prices on many consumer items, coupled with what appears to be attractive financing alternatives such as 24-months interest-free terms and No repayments for 12 months.
Credit card and charge card issuers are eager for you to use their facilities, often offering bonus deals or attractive reward points as incentives.
Its important to assess whether these deals actually work in your favour, or whether they will ultimately cost you more.
A basic rule of business is that whenever you bring in another party to a transaction (and it nearly always is another party as retailers generally dont provide the credit) there needs to be profit in it for them too. Consequently, cash or EFTPOS will always be your strongest bargaining point on big ticket items as you are dealing directly with the seller. When the various credit options are used, the retailer pays the credit providers a fee for being able to offer credit card or financing options and this is a cost either built into the price or added to the financing contract.
So if you can afford to pay cash you may be able to save three per cent or more off the price. For a $2,000 purchase that equates to at least $60 savings. Always ask, What discount can you give me for cash? In some cases you will get a happy surprise.
Be aware that some vendors are now advising there is a surcharge payable (sometimes up to four per cent) if you pay via a credit card. This has been legal since August 2002 when the Reserve Bank lifted the previous ban on this practice.
Interest-free terms
Interest free does not mean payment free. The interest-free finance deals advertised require a regular monthly payment throughout the duration of the contract. Sometimes there is a regular administration fee charged directly as well.
If you can negotiate the best price possible and take advantage of interest-free terms then it can work in your favour. But is there a limit on the time? Is it interest-free for one year with 12 per cent charged on 366 days if youre one day late in paying it off?
A real trap can be when they give you a coupon book to help you with monthly payments but they send it to you after the first few weeks. You pay carefully each month only to finish the time period without paying off the whole amount. Then they charge you interest on the whole amount.
Ask what the price for cash would be even if you have no intention of paying cash for the item to compare the potential savings. If there is no lower price available for an outright cash purchase then this financing method is generally a good deal so long as you read the fine print and ensure you meet the conditions.
Nothing to pay for 6, 12, 24 months
With the Nothing to pay for six, 12, or 24 months deals, the advantage is that you can take the purchased item home today but not have to fully pay for it for some time. This is, potentially, a dangerous form of credit as your financial circumstances may change by the time repayments need to start. The lender will generally require a large deposit, 30 per cent or more. And once the balance is payable, it will often be with a very high interest rate on balances outstanding after the non-payment period expires. Interest charges of between 20 and 30 per cent per annum will usually apply.
If you pay off the entire amount owing before you have to start paying interest, this can be a great financing option. However, be sure to ask the retailer and check the fine print on the contract; there may be a fee charged if you pay out the total during the interest-free period. Again, check the fine print dont leave it to the salespersons version.
Lay-by
Lay-by was once a very popular way to save for an item but the problem today is that most retailers can no longer justify offering it due to the lack of in-store storage space and the financial incentives to promote alternative forms of payment. Lay-by is not a traditional credit facility (even though there is usually a small administrative charge) as you do not get the goods until they are paid for in full. However lay-by works well for people on a budget as there are no interest costs and you only receive the goods once they have been paid in full.
The danger of lay-by is that some small outlets may go out of business prior to finalising your purchase which can mean you not only lose your goods but the progress payments as well. Another danger, especially for hi-tech items such as computer equipment, is that during the lay-by period the prices may come down (whilst you are locked into a higher price) or a newer/better model is introduced at the same price.
Special savings
An alternative to lay-by, with the commitment of regular payments, is a special savings plan with many financial institutions. These let you keep the savings separate from your everyday money and restrict your ability to make withdrawals or pay you bonus interest for months where you make deposits and no withdrawals. Examples are Bonus Savings, Christmas Club Accounts and Holiday Savings Accounts.
Applying for further credit
If the fridge has died and you cannot wait to save for the big purchase, seeking credit from a financial institution will often give you better terms than either a credit card or some of the forms of credit described earlier. The key is to take as much trouble to compare the costs of credit as you do to compare the costs of the products.
When you apply for further credit, a financial institution will not only look at the amounts you currently have outstanding, they will also look at your credit limits. For example, if you had a number of store cards with $10,000 limits, even if you have never used this limit or dont have an outstanding balance, they will count this against you and you may find that additional credit wont be made available.
Non-bank credit providers will make it easy for many people who may otherwise struggle with traditional credit cards to obtain credit. When they have interest rates of higher than 20 per cent this gives them a significantly greater risk margin to allow for credit to be granted.
People who have newly arrived in Australia and have no Australian credit history, or people who have an impaired credit history, can get access to this higher cost credit to create or rebuild a positive credit history, allowing them to access better credit terms in future.
Conclusion
So the bottom line is, any finance deal other than cash will cost you more. And the cost will be either directly or indirectly passed on to you. Knowing the costs versus benefits of different credit alternatives will give you more negotiating power when buying.
Always negotiate the best cash price with a retailer first. Then negotiate what method you will use to make the purchase.
If you need assistance in working out the best credit arrangements for you, or you have financial difficulties due to credit arrangements, your CPA Australia accountant or financial planner can provide professional and independent advice.
