Introduction to Shop Credit & Hire Purchase
When you buy a car (particularly a secondhand car) or an expensive domestic appliance, the garage or store may try to persuade you to enter into a hire purchase agreement. The salesman will make more on selling you the hire purchase agreement than on selling you the car or appliance and so will be very persuasive. Unless you are unable to get an increase in your mortgage or an unsecured personal loan, you would be wise to avoid hire purchase. The interest rate will be higher than you would need to pay for a personal loan and the car or appliance will remain the property of the hire purchase company until all the payments have been made. If you default on the payments before you have paid one third of the amount owed, the hire purchase company can recover the goods, and you are still liable to make the remainder of the payments if there is a difference between the proceeds of the sale of the goods and the outstanding debt! If you have no alternative source of credit and are thinking of signing the hire purchase agreement, read the small print very carefully before you finally decide.
Store Cards
These operate in a similar way to credit cards, but use of the card is restricted to the chain of stores issuing the" card. No cash withdrawals are available. The main difference between store cards and credit cards is the rate of interest charged. It is a rip off: For most of the best known store chains the rate is nearly double the APR charged on the more competitive credit cards. If you have a store card, pay off in full every month - by direct debit if possible. If you can't do this, use a credit card instead. And if you are up to your limit on your credit card, you are probably spending too much for your income anyway. So stop spending.
'Free Credit' in Shops
Yes, that's what it says on the windows and in the advertisements. But remember the most important pieces of financial advice ever given - `If something looks too good to be true - it probably is', and `There is no such thing as a free lunch'. Likewise, there is no such thing as `free credit'. You will always end up paying for it. Here are some of the games that retailers play:
- Putting the cost of the free credit into the price of the goods.
- Where the `free credit' is for a limited period, you pay a higher rate of interest than the market rate when you do start paying. There are often penalties for early repayment so you have to pay the higher rates for a fixed period even if you could afford to pay off the loan.
- Charging big penalties if you fail to start paying when the free credit period ends. Often no reminder is sent out until it's overdue. You might have forgotten or you might have run into hard times since you bought the goods two years earlier.
