Know all the options
Generally the things people buy on hire purchase, store credit or finance deals – such as appliances – are ‘value losers’. Once we’ve bought them their value goes down.
So it’s a good idea to take a moment and ask: Could I hold off on buying this, put money aside each month and avoid going into debt?
There are different options for buying an item on credit. Sometimes hire purchase or store credit isn’t the best option. Banks, credit unions, building societies and peer-to-peer lenders all offer personal loans. We can check what the total cost will be before signing any credit sale or hire purchase agreements.
Homeowners may be tempted to add to the mortgage. But if we don’t quickly repay the extra money borrowed this could end up being an even more expensive option than HP. A home is not really a source of cash, and when our property values rise, until we sell up, we’re really only increasing how much we can borrow.
Find the best interest rate
Interest rates vary greatly. Personal loans and credit cards charge around 12–20% interest. Store cards from national chain stores charge interest as high as 25% a year.
Hire purchase and credit sale agreements range from 17–27%. Interest.co.nz has some of the latest rates.
With that sort of extra cost it pays to look around for the best deal. A $2,000 purchase over three years could cost between $2,570 and $2,940 – and that’s before other fees are included.
Adding it to a mortgage still means paying about $2,220, even if it’s repaid at 7% over three years, and the temptation is always to pay it off over a longer term, adding more to the overall cost.
Interest-free periods are great – we just need to repay the total cost of the purchase within that time. Otherwise, these deals can turn out to be very expensive.
Check the fees and charges
Most hire purchase or credit sales agreements have a range of charges and fees. They might be bundled into the debt we have with the retailer, in which case we may not notice them. We could be paying $100 or more in establishment and account fees, even on an interest-free deal.
The retailer may insist on repayment insurance as part of the deal. This generally means that if the borrower dies, the insurer pays the lender the full amount owing. These policies also cover loss of income, such as through accident, illness or redundancy, so repayments are made for a period of time specified in the policy.
Paying the premium will add even more to the amount we owe on hire purchase and it may be an unnecessary cost. For example, someone not in paid work won’t need cover for redundancy.
The Consumer Protection website has information to help decide what insurance we need when buying on credit.
Top tips for hire purchase
Hire purchase and credit sales agreements can be a good option if we treat them with care.
- Always ask the retailer to disclose all the fees and charges over the full repayment period. They should give a single, total dollar amount of what the hire purchase deal will cost.
- If the hire purchase deal offers 0% interest, ask what the interest rate will be on any amount still owing at the end of the interest-free period.
- By law you must be given a ‘disclosure statement’ detailing all the terms of the credit deal before you sign. Ask for a copy of this statement and read it carefully before agreeing to any deal. If the statement is difficult to understand, get help from someone like a budget adviser who can make it clear what you’re committing to.
- Compare the charges and fees with the sticker price of the product itself. It may be that the hire purchase charges amount to more than the interest we would pay on a different sort of loan or credit card.
- Work out the total interest and other charges with our debt calculator and see how long it would take to get out of debt.
- Avoid taking on several hire purchase or finance deals at once. It can be hard to service several debts at the same time. And there’s more risk of not paying the full amount within the interest-free period and being hit with high interest rates.
- Take time to decide. While, by law, you have five working days after receiving a disclosure statement to change your mind and withdraw from the hire purchase or finance deal, you will still have to find a way to pay for the purchases you made. Find out more about borrowers’ rights on the Consumer website.
Zero-percent hire purchase or store credit agreements are only worth it if you’re sure you can repay them within the interest-free period.