Store finance deals buying guide

Low-cost deals for those who pay on time, exorbitant interest rates for those who don’t — and a warning about deals to avoid.
 
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  • Updated:3 Nov 2006
 

01 .Introduction

Store-finance-deals

Joanne wished she’d paid closer attention to the fine print in her store finance contract when she was debited more than six monthly payments after her two-year lease payment term ended.

The problem was she forgot to notify the finance company when she moved house and to contact the company at the end of her payment term — if she had, she probably could have bought the item for less than the hundreds of dollars she forked out in extra lease payments.

George also got a shock when, too late, he calculated the finance deal he’d signed up for was costing him somewhere between 30% and 50% more than the price of his new TV.

Store credit deals are lucrative for finance companies and can be profitable for retailers too, but for consumers they’re a real mixed bag. Some provide good value if used cleverly; others should probably come with a wealth warning. This report compares your options and highlights what to watch out for when you’re out and about (maybe treating yourself to a new plasma or LCD TV) this festive season.

  • Interest-free deals can be just that. But fees can apply — and up to 28% interest if you don’t pay in time.
  • Consumer leases (often promoted as ‘rental’ agreements) can be expensive and full of traps.
  • Check and negotiate the item’s cash price first — there’s no point paying too much just because it’s interest-free. You might get a better price for cash.

Please note: this information was current as of November 2006 but is still a useful guide to today's market. For more recent information, see Interest free shopping offers 2011.

 
 

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Consumer leases ('renting')

A consumer lease is a form of financing for which you need to really have your wits about you when you’re considering it.

While simple renting (where you're not locked into a long contract) may be attractive under certain circumstances (see below), what’s now often offered as store finance is a form of leasing contract that has a fixed period (such as three years), after which you have options that include:

  • making an offer to buy the appliance for its market value,
  • buying a similar model (usually for a nominal amount like $1)
  • ‘upgrading’ to a new model with a new lease contract.

Several companies offer various types of consumer lease. We’re far from impressed by some of the prices and deals that we’ve seen offered by leasing companies and retailers. Flexirent is probably the most prevalent company in this area (see Case study: unfair deal), but a range of companies offer similar deals or variations. Here are some of the things to bear in mind about leasing:

  • Expensive. We’ve seen examples in shops of how lease payments can accumulate to 50–100% above the original cash price. You could own the item much sooner (with approximately similar monthly payments) by using interest-free finance instead.
  • No ownership. With all leasing companies, despite paying all that money (more than the cash price), you won’t even own the item unless you’re able to buy it at the end of the lease period (see Leasing loopholes).
  • Locked in. If you want to get out of the contract early, you may have to pay all lease payments anyway. We’ve seen this in Flexirent and RentSmart contracts.
    Total payments or interest rate not shown. Brochures from companies such as Radio Rentals don’t advertise what the total lease payments will add up to, or the item’s cash price, just what the regular lease payment will be.
  • No interest rate. Because it’s a lease and not a loan, the equivalent interest rate doesn’t have to be disclosed. Makes it hard to know if you’re getting a good deal.
  • Heavy contract terms. You could be obliged to pay lease payments no matter what happens, even if the equipment is defective, lost, stolen, damaged or destroyed. Sometimes you have to pay for insurance (it’s optional with Flexirent) — even though you don’t own the item.

Simple renting might be attractive under some circumstances :

  • For example, to rent a widescreen TV for a weekend to watch the upcoming Ashes with friends.
  • For people in temporary or shared accommodation to rent appliances for a short time.
  • Rental deals are also sometimes aimed at people who don’t qualify for credit (assess their affordability before signing up!).
  • Plus companies say they take care of delivery, installation and servicing.

Businesses: leasing companies often target businesses that lease computers and other technology, and there can be tax and other advantages for businesses.

In-store credit

We profile the credit deals (including interest-free) that you're likely to see in shops:

‘Buy now, pay later’

  • Ownership: You take the appliance home with you immediately, and during the interest-free period (usually up to about 18 months) you pay only an establishment fee and a monthly fee.
  • Fees apply: GE Money (products include Buyer’s Edge, CreditLine and Go MasterCard) and HSBC charge a $20–$25 establishment and $2.95 monthly fee for their ‘deferred payment’ deals.
  • Interest-free period. Repaying the full amount borrowed (including fees) any time within that period, either in a lump sum or with smaller repayments, avoids interest.
  • High interest can appy. Rates for balances repaid after the interest-free period range from large to exorbitant, so whether these deals are worth considering hinges on when you’ll repay. For example, HSBC charges 17.9% pa to 24% pa (depending on how it assesses your risk rating); GE Money's rate is 27.99% pa.
  • A card is often part of the deal — a ‘normal’ credit card that can also be used for other transactions, a department store card (watch out for rates that are higher than average credit card rates) or a card primarily used for interest-free promotions at participating retailers.

Interest-free instalments

  • Ownership: Again, you get the appliance immediately, and the credit provider calculates the regular monthly payments required to clear the loan and fees within the interest-free period.
  • Fees and interest rates are similar to ‘buy now, pay later’ deals.
  • The regular monthly payments to clear the loan on time and avoid interest are more than the ‘minimum payment due’ shown on your statement — that’s just the amount you have to pay to avoid a late payment fee (up to $30).
  • Deposit required: some providers require a deposit — department store David Jones, for example, needs one third of the price upfront (the other two thirds to be repaid in equal instalments during the interest-free period, before interest at 21.9% pa kicks in).

Interest from the start

Not all credit deals are interest-free — some charge interest straightaway. Rates are likely to be higher than competitive personal loans and credit cards. Some deals, like one from HSBC, give a no-interest period (such as one year) before charging interest for the rest of the term. But with 17% charged for the remainder (for example, three years), it’s not an option we’d recommend — unless you repay in full within the interest-free period.

Direct debit arrangements

This can be a good option offered by some retailers: a regular interest-free direct debit from your bank account or credit card to pay for your purchases over time. Labelling it ‘take-home lay-by’, Certegy Ezi-Pay offers such arrangements for items including furniture and jewellery. Often, these direct debit deals are rebranded by the retailers that offer them. For example, at Freedom Furniture it’s called Freedom Ezi-Pay.

  • To qualify: You must be over 18 and work at least 30 hours per week to qualify (exceptions to the working requirement include aged pensioners, self-funded retirees and others).
  • Deposit required: Sometimes a 25% deposit is needed, and sometimes there’s a $10–$20 application fee (imposed by the retailer, not Certegy).
    Like a credit card with that?

Retailers’ interest-free promotions are a way for some financial institutions to sign up new credit card customers — if you take the interest-free offer, you have to take the credit card too.

  • While the interest-free promotion might be good value, check out the card’s merits before saying yes — particularly how interest will be calculated and charged and especially if fees and a high interest rate will apply to other transactions.
  • For example, HSBC pushes its standard (not low-rate) card through retailers — it has a $59 annual fee and 17.95% interest rate. GE Go MasterCard has a 17.99% standard rate (no annual fee, but a $25 establishment fee applies).

03.Case study: unfair deal

 

George, a CHOICE reader from Penrith, NSW, recently signed a Flexirent contract for a $2650 TV.

“I’d planned to use three-year interest-free finance and pay it off before interest kicked in, but the Harvey Norman sales assistant suggested Flexirent EzyWay instead,” George says. “I asked if any fees applied — the answer was no. I assumed that renting would cost the same as interest-free finance, except that I’d have the option to upgrade the TV at the end of three years.” A surround-sound system was thrown in to sweeten the deal.

George signed the necessary papers in the store, but got a shock when the full contract arrived in the post a week later. “The monthly payments of almost $110 would accumulate to $3950 over three years. I called Harvey Normanand asked why I was paying $3950 for a $2650 television [or $3049 if you include the ‘free’ sound system, which Harvey Norman values at $399]. They referred me to Flexirent, which said there was nothing I could do: ‘Too bad, you’ve legally bound yourself to the agreement by signing the documents’ was their attitude.”

Next, George discovered the deal had no cooling-off period, so he couldn’t cancel it when he received the contract and realised its real costs. (Later, he realised the $3950 figure was disclosed on the papers he’d signed in the store, but he’d overlooked it, relying instead on what the sales assistant said.) And in a real consumer sting, to get out of the contract after just a couple of weeks, he’d still have to pay the full $3950. “This is so unfair, as I specifically asked the salesman if there were any extra costs.”

  • Flexirent says information and costs are disclosed and explained to customers by regularly trained sales staff;
  • Harvey Norman says due process was followed and the full terms, payment obligations and costs were explained.

Good outcome but concerns remain

In the end, Flexirent offered to cancel George’s contract and give him the TV for the retail price ($2650), paid in equal instalments over two years. The sound system was his to keep free of charge. A good outcome — but one that wasn’t forthcoming until CHOICE got involved, despite George’s numerous calls and complaints.

In the last three years, over 30 complaints related to Flexirent that were made to Consumer Affairs Victoria alone have required conciliation. Complaints included representations made at the point of sale (by third parties), information in promotional material and direct debiting after contracts have expired. Meanwhile, the NSW Office of Fair Trading is monitoring Flexirent and considering what action to take, and consumer credit centres and a debt counsellor we contacted are warning consumers to evaluate the full costs and alternatives before entering into such arrangements.

04.Loop holes and options

 

Leasing loop holes

Instead of an expensive consumer lease, you’d usually be better off buying goods on interest-free finance or even using a credit card (depending on the interest rate). But it’s little wonder some finance companies push their leasing arrangements:

  • They charge much more than the value of the item.
  • Some lock you into contracts with expensive exit fees.
  • They don’t have to disclose the cash price in brochures.
  • There’s no interest rate to be disclosed either.

CHOICE wants to see leasing companies (and retailers) forced to prominantly display the following, so you’d be in a better position to compare finance deals:

  • How total lease payments add up compared with each product’s retail price.
  • All charges and early repayment fees.
  • Effective annual interest rates.

The situation is made easier for leasing companies because lease contracts don’t have to comply with certain laws that apply to loans. Under the Uniform Consumer Credit Code, an agreement that gives consumers the right to buy goods at the end of a payment term isn’t in fact a lease. It’s technically a loan or a sale of goods by instalment. So leasing contracts are designed so that consumers can offer to buy the goods later (allowing leasing companies to compete with in-store interest-free finance), while at the same time being structured in ways that avoid the stricter regulation of loans. For example, we see:

  • lease contracts allowing consumers to make an offer to buy the goods, but not giving the right to buy them (technically, that’d make it a sale by instalment).
  • leases giving consumers the right to buy similar goods (but not what they actually leased) at a fixed price at the end of the term (sometimes a nominal amount, like $1).
  • leases that say you can ‘keep the goods forever’ while, technically, the lease company retains ownership (this also ensures that legally the arrangement remains a lease, while in practice some of its features are similar to a sale by instalment).

The bottom line for cost-conscious consumers is that in most cases, if you want to own the item, avoid leasing.

What the options cost

The table compares what you could pay for a $2500 purchase with various finance options, rounded to the nearest dollar.

$2500 Purchase options Cost of credit ($)*
OPTION A: Pay cash Cash price: $2500 0
OPTION B: 2-year 12% pa bank loan Total payments made: $2924 424
OPTION C: 2-year consumer lease (’rental’ deal) Total payments made: $3312 812 (A)
OPTION D: ‘Buy now, pay later’ interest-free finance over 18 months Repaid within 18 months 73
80% repaid within 18 months and balance repaid 1 year later 246
60% repaid within 18 months and balance repaid 1 year later 386
OPTION E: Interest-free instalments over two years Repaid within two years 96
Only pay minimum amount for months 19–24 then return to original repayments 136
OPTION F: Credit card 10% pa card, repaying $115 per month for two years
260
16% pa card, repaying $122 per month for two years 424
 

Table notes

* Cost of credit includes fees, any interest paid, and/or lease payments.

(A) in this case, 'credit' means the cost above the retail price; it's 32% higher.

Option B: Two-year 12% pa bank loan

  • This assumes a $100 application fee and 12% pa interest rate.
  • The fixed repayments required to clear the loan are almost $118 per month for two years.

Option C: Two-year consumer lease (‘rental’) deal

  • Based on a two-year consumer lease, the monthly payment required is $138 (quote from a leasing company website).

Option D: 18-month ‘Buy now, pay later’ interest-free finance

An 18-month interest-free term is generally the longest available. Our example assumes GE Money’s $25 establishment fee, $2.95 monthly fee and 27.99% pa interest rate.

  • The first calculation shows the cost if you repay in full within 18 months.
  • The second and third calculations show what happens if it takes you 12 months longer. In these scenarios, you make only the minimum monthly payment (the greater of $30 or 4%) during the following 12 months, and then repay whatever is left to clear the loan. Failure to pay the minimum incurs monthly late payment fees.

Option E: Interest-free instalments over two years

This example assumes GE Money’s $25 establishment fee, $2.95 monthly fee and 27.99% pa interest rate.

  • The first scenario shows what happens if you pay in full within two years.
  • The second scenario calculates what happens if you can only make a minimum monthly repayment (the greater of $40 or 3% — in this case $40) for months 19–24, then returning to your original repayments until the loan is cleared in full. (The minimum monthly payment is less than the monthly instalment to fully clear the debt, which in this scenario would be $108.) Failure to pay the minimum monthly amount may incur late payment fees.

Option F: Credit card

  • We show approximate interest charges when you make the regular repayment amounts needed to clear the loan in two years at rates of 10% and 16%.
  • Paying less (or late) can incur late payment fees. We assumed interest is backdated to the date of purchase on the full amount (the most common and ‘mean’ way card companies use).

Looking for credit?

1. Personal loan. Shop around for the best deal. Consider the annual nominal interest rate and application and account fees. You should find out what other fees and conditions apply for the loan you’re interested in, and ask the bank for an exact quote for your repayments.

2. Deferred payment deal. With these kind of deals you can defer paying for an item for up to 18 months. There’s no interest during that time (although account fees may apply), but after that interest is charged on whatever is still owed.

3. Interest-free credit by instalments. With these kind of deals you repay the cost of the item in equal monthly instalments. Late payments can lead to interest charges and fees.

4. Consumer lease agreements. You rent the item but don’t get ownership.

5. Paying up-front. Paying up-front means there’s no cost of credit and you’ll own the item straight away. However, there’s an ‘opportunity cost’; by paying up-front you’ve lost the opportunity to invest that money somewhere else.