Tan Kin Lian's Blog: Buying consumer goods on installment payment

Saturday, January 30, 2010

Buying consumer goods on installment payment

A furniture store advertised several products, e.g. television, notebooks, computers, furniture, cameras for sale on cash or weekly installments over 48 years.

Here is an example:
Notehook: cash price $1,299
Weekly installments over 4 years (i.e. 208 payments) of $11.87

Here is my calculation of the interest charges:
Total payment over 4 years: $2,469
Cash price: $1,299
Interest charge: $1,170
Annualized interest rate: 36%

Using installment payments, the customer has to pay almost twice of the cash price. The interest charge is almost as much as the cash price. The same formula is applied consistently on all of the products offered on weekly installments

By saving in advance and paying cash, the customer can save a lot of interest charges. It is important to save and pay cash, rather than buy consumer products on installment payments.

Tan Kin Lian

17 comments:

Laremy said...: Hi Kin Lian,

Perhaps you could also elaborate on why it is necessary to save in advance, as well as reiterating good shopping habits.

If a customer were to spend $400 on a refrigerator at one go, she or he will have $400 less to spend on paying the utility/telephone/internet bills for that month.

This might be so if she or he has not budgeted for that expenditure.

This will result in a situation whereby the customer incurs a late-fee penalty when she or he pays those bills in the subsequent month.

Hence, saving up/budgeting for the expenditure in advance allows the consumer more control over her or his money.

Implicit in this logic is good shopping habits: making sure the consumer really needs the product i.e. a new refrigerator because the old one has broken down, and not a new refrigerator because it's fancy.

Hope this adds an additional dimension to your argument.

Cheers,
Laremy; January 30, 2010 1:46 PM
Anonymous said...: Hi, what do you think is this company's business?
It is NOT in the household appliance or furniture business. IT IS IN MONEY LENDING BUSINESS. This company finances all the hire purchases themselves and that is why they are able to give good prices for their goods. They like you to buy on hire purchase and this is where they make money and NOT the furniture or appliances.The real business is hidden.; January 30, 2010 5:09 PM
Thien Rong said...: Some places offer interest-free installment so it might not always be bad.

However, there is always the time value of money. Where a dollar today is not equals to a dollar in the future, especially if it is well-invested.; January 30, 2010 7:11 PM
symmetrix said...: TKL,

Spot on. I believe I know which company you are referring to, but no names mentioned.

Some major retailers take out big newspaper ads especially on Saturdays highlighting the low installments. I'm concerned that many ordinary folks may be short-sighted, just look at the low periodic instalments, and buy the product. They fail to see the big picture years down the down.

Isn't this biz practice subtly misleading the consumer? Can CASE act against such retailers?; January 30, 2010 9:40 PM
Anonymous said...: it is a big AH LONG business.; January 30, 2010 11:56 PM
Anonymous said...: When these companies advertised in Malay language newspapers, they emphasise the low monthly installments to be paid for the product. And even for expensive items like cars! They may not even put the price if you want to pay in full at one go. In other papers, they have both.

So you can see their target marketing strategy and also what type of buyers will opt for the monthly installment payment.; January 31, 2010 1:09 AM
Anonymous said...: REX comments as follows,

Actually i was surprised that there is such a company which charged such high rates. Many companies charge 0% interest, and they are able to do this because they partner with a designated Credit Card Co. which means the credit card company is assured of the profits from the commissions at the back end. In such cases the consumer DEFINITELY benefit from the zero interest payment scheme! I always buy using such schemes, and i have a special accrual account in which the visa charges are deducted from there. So although i pay by instalments over 4 years, internally, i fully pay the cash into the accrual account (that account is the 0.3% FppOCBC account which enjoys higher interest than normal!) for its monthly deduction, so i'm enjoying the zero interest "loan" yet enjoying also higher interest while the money is sitting in the accrual account waiting to be deducted monthly! Smart?

The second point i wish to suggest is that the REGULATOR should step in and LEGISLATE rule so that ANY COMPANY WHICH OFFERS DEFER PAYMENT SCHEME MUST SHOW UPFRONT THE PERCENT CHARGES (in this case 36%) otherwise that company will face a stiff penalty and fined heavily. As usual the regulator doesn't care and let these greedy companies continue to cheat the simple minded people. It is very sad situation here, very very sad.

REX; January 31, 2010 8:52 AM
Tan Kin Lian said...: There are some retailers that allow installment payments with 0% interest.

I think that they have marked up their price and may have to pay a certain percentage to the credit card company.

They should be able to offer a discount, if you pay by cash. So, it may be a hidden way to load an interest charge.; January 31, 2010 9:12 AM
Anonymous said...: rex comments as follows,

as far as i noticed, the prices of the items which are offered at zero interest, don't seem different from other shops which sell the same items without the 0% interest, and i wud usualy make a comparison to check out the difference before committing.

rex; January 31, 2010 6:32 PM
symmetrix said...: An interesting thing happenned when I purchased a new car 4 yrs ago from an authorised distributor.

Price of car was x, if I take a loan. I asked if I could get a discount if I pay 100% cash upfront for the full amt. Salesman said price will be y, which was HIGHER than if I take a loan with monthly instalments. This was odd, but salesman said that this was his company's pricing policy.

There was a workaround, ie to take the minimum amt of loan over the shortest period of 1 yr. This will incur the minimum interest payable by me. The total interest payable worked out to be z.

Now, the interesting part was that x + z < y. That is to say, taking a small, short-term loan AND paying a small interest was favourable to me. The salesman conceded on this point, and hence I took this option. Of course, I had to bear with a lot of spam eml from the FI, but hey it was worth it.

Bottom line: Work out all payment options before deciding. Sometimes the normally unfavourable choices may indeed be better.; January 31, 2010 9:52 PM
Anonymous said...: banks or finance co will pay commission to car dealers ranging 3-5%/ for a 100k loan, the car dealer will get 5k extra. if u pay full in cash. they earn zero.; January 31, 2010 10:46 PM
Anonymous said...: Almost 99% of cars on the road are helping the finance companies.
These owners are in perpetual debt.
Sell the car? they loose $$
Keep the car? they pay $$
So, it goes on.. get a new car, get a new loan.
Once you own a car, you will be in debt forever.. unless you are willing to take a loss.

Effectively working for the bank and finance companies.. and helping the Gov fill their tills and the petrol companies too.; January 31, 2010 11:15 PM
Anonymous said...: I saw the low interest installment weekly on the papers. I was puzzled but did nothing. Until when I needed to buy a new TV or computer, I did the same calculation as you and decided that the above scheme is stupid and wonder whether anyone will fall for it. Next, I survey the mega store for the model I want and noted the price. Then I compared with other Mega Stores & heartland stores. The comparison includes, warranty, delivery, price and brand. After I made my decision, I look for interest free installment on the credit card.

There are thousand and one ways businesses earn from customers. At about $20,000 full advertisement page expenses to bear, how this company recoup? The fastest way is to come up with dirty scheme and attract people whose decision is based on low monthly installment.

The fact of the matter is the Singapore regulator will not micro-manage [too busy counting his million dollars salary], the consumer has to be prudent. The rule of thumb is spend on needs first. Compare price/benefits for a while before buying. When buying, look for interest free installment.

Sgp market is small, there is always a better deal somewhere and it is up to you to search it out. Regulator has no time to be bothered as they are paid by tax payers to serve the ministers, not you.; February 01, 2010 12:45 PM
Anonymous said...: REX comments as follows,

re. VS Lingam post.
I had the same xperience 5 years ago when i bought my car. Taking a loan was cheaper than paying upfront! It's same as the zero instalment payments, the seller has side deals wit the finance companies or credit card companies, so the consumer does get some benefit in a way which at first don't seem logical. but it is true, instalment payment often is cheaper than upfront payment. It's not a problem, i don't see why any consumer should complain, so long as he does his sums and select a good offer.

rex; February 01, 2010 12:47 PM
Raymond Choy said...: Hi Mr Tan,

Many Customers or the Public do not know or understand the difference or understand how this works. Thus, They are being exploited by those who understands. This is issue of "Ignorant". (They are consumers who are caught by their desires or have poor knowledge).

The next issue is the question of "Needs vs Wants" for these ignorant consumers to decide. (who usually cannot see or tell the difference).

The Final issue is their Personal Choice to "have or not to have". (Unfortunately, most of Consumers want to have Immediate or Instant gratification instead of Delayed Gratification).

Maybe Education is one of the solutions.

Are our schools, parents, social organisations,etc. teaching any of these basic skills (e.g.savings in advance,needs vs wants, etc.) in modern Singapore instead of "I Want! I Want! I Want!", I wonder?; February 01, 2010 3:48 PM
symmetrix said...: Re REX's comment on February 01, 2010 12:47 PM.

Glad that you enjoyed the same benefit as me. Greatest benefit to consumer will occur when you take minimum car loan (in my case $25k) over minimum period (in my case 1 yr).

If a consumer takes max car loan over 10 yrs, all hell will break loose. Unfortunately many consumers, knowingly or unknowingly. fall into this trap.; February 03, 2010 8:22 PM
Anonymous said...: Financial Literacy for schools by Christian TT Chua.

This was the book given to Sec School last year and I believe it was done during a road show which includes talk.

When I ask my 2 secondary going children, they cannot remember what is it all about. I read the book and my conclusion is one can only appreciate if one has been burnt before.

So, is it necessary to be burnt before one seriously get interested in financial literacy?

MOE should be more active in this area else the biggest casualties are those who are transiting from school to working life. Spend beyond their means as a young adult will result with high debt life style which will be a burden to their family and the nation. The only winner? The banks and the govt.; February 04, 2010 12:24 PM