Buying on credit comes at a price

2012-11-03 08:50

Maya Fisher-French looks at how a R3 000 washing machine can end up costing you more
than R7 000

The Electric Express appliance store on Adderley Street, Cape Town, is selling a 9kg Samsung top loading washing machine for R3 000.

But the store offered an option to buy the washing machine on credit and pay it off in 24 months for a massive R7 161 – more than double the value of the machine.

What many people do not realise is the amount of hidden costs in taking on debt.

While the store may appear to charge a reasonable interest rate of 21%, similar to what you would pay on a credit card, they make their real money on the extras like insurance and service fees.

Based on this quote, you would have paid R299 a month plus a final payment of R884.

If you had delayed the purchase of the machine and saved R300 a month, you could have bought it with cash within 10 months and saved more than R4 000 in unnecessary costs.

Once you had bought the machine, you could continue to put that R300 away into a savings fund and move from being indebted to an appliance store to creating long-term wealth.

In a unit trust or exchange traded fund, that R300 per month would grow to R25 000 within five years.

Alternatively, you could save the R300 in cash each month and know that you never have to go into debt to buy an appliance, ever.

How a loan typically works

1. Initiation fees
The fee that you are charged upfront to cover the administration costs of the loan.

Initiation fees are R150 plus 10% of the value of the loan that exceeds R1 000.

The maximum initiation fee that can be charged is R1 000 excluding VAT (R1 140 with VAT).

2. Administration/service fees
These are the fees that the customer will be charged for the administrative costs involved with servicing the loan on a monthly basis.

Monthly administration fees can be up to R50 excluding VAT (R57 including

In this case, the store charged R37.50 if you paid by debit order.

If not, the cost could have risen to R57 per month or R1 370.

3. Credit Life insurance
This insurance covers you for certain risks, usually for death, disability and retrenchment.

Although technically you are allowed to shop around for this cover, many lenders will not lend the money unless you take cover with them and the rates are very steep.

In this quote, you are paying R1 125 to insure debt of R6 750.

4. Product insurance
This provides insurance should your item be stolen or damaged.

The store is charging R677 to cover a washing machine worth R2 799.

If you already have household insurance you should not be required to take out this cover, but then again stores simply hold people to ransom and refuse to approve the sale.

5. Finance charges
5This typically includes the interest payable, which in this case is 21%.

Unsecured credit is usually charged at higher interest rates than secured credit, which is given on an asset such as a house or car.

Although interest rates are capped to certain maximum levels, according to the National Credit Act this can still be as high as 5% a month or 60% a year.

6. Monthly instalments
This is the amount you will pay monthly towards paying back your loan.

Find out if the store is loading the final payment as is the case with this quote where in your final month you will be faced with a whopping R884 fee.

It is not exactly clear what the final payment is for as the instalments over 23 months meet the total debt amount.

7. Principal debt
This includes all initial costs: initial purchase price, delivery charges and initiation fee.

VAT (value-added tax) 8All the figures illustrated include VAT, however, the store quoted prices excluding VAT, so this can come as a nasty surprise.

Always ask what the costs are inclusive of VAT.

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