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Money Expert - Diana Clement - Financial Planning, Career, Investing, Economy, Property - MSN NZ

The devil's debt: Hire Purchase

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If ever there was something designed to make you poor, it's Hire Purchase (HP). This type of borrowing is laden with extra charges and traps for the unwary. Even those interest-free deals can have fees you have to pay and tricky fine print. So beware!

HP, or consumer contracts as it's officially called, is also not quite what it seems. You're not just getting a one-off loan. Companies such as GE Money and Consumer Finance, which provide HP through high-street shops, give you a card when you take out your first HP. This is, in effect, a line of credit, which allows you to buy more and more. Store cards such as the Farmers Card are very similar.

HP is a very expensive way of borrowing. Credit Line from GE Money and the Q Card from Consumer Finance often have higher interest rates and more hidden fees than their cousins from the high-street banks. When I checked on Interest.co.nz, the GE CreditlLine interest rate was 25.65 percent per annum and Q Card from Consumer Finance 23.70 percent. Compare that with a 15 percent minimum for an unsecured loan or 12.50 percent for the cheapest credit card available, although the annual fee was $60 on that card compared with $25 for the Q and GE cards.

What makes HP really evil in my opinion are the charges added to the item you buy which make it more expensive than buying with cash.

With HP you'll often pay administration charges (sometimes called establishment or documentation fees), which can be more than $100 to set up the deal. Missing a payment will result in default fees each time — making it a real pain in the wallet.

You may also be stung for replacement cards, to print a statement, or vary the repayment terms. Add all those fees together and roll them into the loan and your debt can turn into a bit of a getaway train.

That's not all! The chances are you'll be told you need to buy insurance and encouraged to pay for an extended warranty, which are loaded into the sum you pay interest on.

Anyone who reads my blogs will know I'm not a believer in borrowing money for consumer goods at all. It is genuinely possible to do without most things — saving a little to buy second-hand makes incredibly good sense.

On the other hand, a friend of mine explained, to my horror, she didn't have the cash to buy any second-hand furniture, but "cashing up" with her GE CreditLine Card allowed her to bring home new stuff — instantly inflating the bill. At her current salary it will take years to pay off the debt for one lounge suite (which is already worn out), a stereo and a TV.

A banker who I once interviewed described the cards as the scourge of the poor area where his branch was situated. Time and time again clients ended up in financial dire straits. Every month, more and more charges were rolled into the debt — making it nigh impossible to escape.

Sure, a one-off HP purchase is usually manageable for most people. The minority will also be able to pay off the goods within the "interest-free period", but will pay the fees. But where you can hit the slippery slope to permanent indebtedness is by buying more with the card you've been given.

More finance information

User comments
I got a q card with a limit of $1000 to buy a new laptop. I paid it off within 6 months and did not get charged one cent of interest. These cards are only bad if you are incapable of paying them off. Why save and wait for something you need for 6 months when you could get it today & not have to pay any extra? PLUS - your also getting a good credit rating IF you pay it off fast.
Q Card is for ill educated losers. Just look at the people that use them. You're fooling yourself. Same goes for GE Money and any loans from Instant Finance.
Hi, here is our take on it, We have the money for all the new appliences required for our kitchen renovation in an online savings account and have just purchased them on 17 months interest free with Q card. When the 17 months expires we will pay the balance in full and will of earned interest on that money over that time period. Both my partner and I are committed savers and belive this is a great way to earn interest on capital while enjoyiong the goods for 17 months interest free? any thoughs on possible downsides to this? (we will definitely not spend the cash and let HP run its full course after 17 months) Cheers Matt
Have just read your article with interest and would just like to say a big thank you to Q card as thru them at a very reasonable rate I may add we were able to purchase something that we always wanted to own. The interest rate was only 19.75% and the establishment fee only $35. Not that much different to the banks personal lending rates. But hey we were actually turned down by the bank because we are too old ( 48 ) Apparently my age group has a tendency to spend money rather than save and we tend to have no assets. Plus HP's are great if you stick to your budget. I doubt there is any bank or finance house that would lend you mone for say a car with out asking you for all your personal details downto pretty well much what you eat etc. But HP well walk in and drive out in your dream car. There is a place for them.
Hi, my grandfather allways told me that if i want something to save for it, when i buy something I know its mine and interest free, especially on items we can all live without. Its been good advice which i follow. Ive seen lots of friends waste lots of money on interest and having to have the latest thing, only to discover when its finally paid off its old, out of date and worthless and so start all over again, never getting out of dept. I still cant understand why the 16 to 30 year olds have to waste all this money on cars which is the biggest waste of money out, are they so insecure that they need to feel good in a flash car, working for the next 5 or so years to pay the interest, when its paid the car is worthless, bad investment! All that interest adds up to a good start on a deposit for a house, what are parents teaching these kids?
Excellent comments from both of you. Thanks for taking the time to post.
Hi Diana, Thank you so much for your timely advice. I'm about to move into a house I've just bought, and I was thinking about putting a few things on HP... I need a fridge, want a DVD player, etc... NOW, because of the advice and information in your article, I DEFINITELY WON'T be taking up a 'Consumer Contract'. Many thanks again, Robyn
I was with Q-Card when I purchased my laptop and when I found out I was being charged 23.7% I was so horrified that I immediately went and refinanced with a personal loan from my bank which took the interest rate down to 17%. Never, ever, EVER hire purchase if you can help it! Always go through your bank - you are a valued customer of theres (at least, I have been with the BNZ since I was 19) and they will ultimately will look after you more than a finance company who doesn't know you from Adam would.

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