Monday, October 22, 2007

High cost of borrowing

Here are some tips, which I hope will be helpful to the young people.

Many people are not aware about the high cost of borrowing. They may not be aware that they are borrowing at all.

Buying a product on 12 or 24 months of "interest free" installments is actually borrowing. If you pay cash, you can easily a 5% or 10% discount on the price.

What is the borrowing cost, over a 24 month period?

If you pay interest at 1% per month, the total payment over 24 months is an additional 12%. If you pay interest at 2% per month (i.e. the rate the credit cards normally charged on rolled over balances), you will pay an additional 27%.

If the merchant that gives you "interest free installment" incurs an interest cost of 1% per month (i.e. the cost of funds provided by the financing company), this merchant will give you a cash discount of up to 12% on the product.

You can negotiate for this cash discount. The merchant has probably added this financing cost to the cost of the product.

Suppose you like something now, and does not have the cash to pay for it?

My advice. Start to save now for the things that you may need in the future. By paying cash, you can save up to 12% to 24% on the financing cost of the product. It is a lot of money to save.

Here is another option. Ask yourself? Do you really need to buy that product now? Can you save first and buy it 2 years later?

By that time, the product will come down in price and you save on the financing cost as well. You will get double benefit! You may also get a better product, as products are being improved all the time.
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4 comments:

Anonymous said...

Hi Mr Tan,

in this day and age, I still know of friends who do not go on holidays (or if they do, they go on very cheap ones) and do not renovate their homes when they move in (just simple paint work and cheap furniture).

These friends are not poor. They are just very matured in their thinking and know that some things are wants, not needs.

They can easily afford a HDTV or a holiday in Europe but they choose to live simply but never have to worry about money issues.

I think they are very smart.

October 22, 2007 12:32 PM
Anonymous said...

Usaually the price is already marked up before offering you at imterest free. They are not idiots. They are in business for profits. We are the suckers.
Remember to ask for discount too from your friendly, sexy and gentle insurance salesman or woman if there is no advice given.If it is just form filling be bold to ask for at 3 months discount. Why pay high commission for form filling? Maybe you should fill yourself and get deeper discount.

October 22, 2007 1:46 PM
Khiat Han Hwee Adrian said...

Its important to save but its also important that we know how we wants to live our life.

Its not foolish to spend on a well deserved holiday or to renovate your home which you spend most of your relaxing time in.

We will not want to bring all our monies into the grave.

October 23, 2007 10:45 AM
Anonymous said...

Both views are right, it depends on what one needs as well as wants. For many years, I travelled and live abroad. Each time, since I spent an average of one or two years in a place, I refrained from spending for things I like, e.g. having a fish tank as I like to keep fishes. I thought then that since I am not staying there permanently, I should not spend money on something I like. But the problem is, we are on this earth also not premanently. So if we extend this thinking, then we might as well not spend the entire time we are on this earth. So my conclusion is that though we have to be prudent, it also makes sense to spend money to make ourselves happy, as our life on this planet is not permanent, it is the now that matters most and we should spend a little to make ourselves and our family happy.

October 27, 2007 8:15 PM

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