Thursday, 15 January 2015

Beware monthly repayments, they're really a loan!

Ah, is it time to renew you insurance? Are you buying a new mobile phone, washing machine, TV, vehicle or any other expensive item? or perhaps you are repaying a credit card purchase? The financial experts behind these services are really helpful - they do not want you to go through any hardships with your daily dose of visual entertainment on the TV. They'll even throw in free next day delivery in most cases.

Why settle for a 40" dumb TV with a plain old HD LED screen, when you can have 58" 4K TV with built in free view, smart remote, wifi capabilities, media streaming with a propriety interface and badly designed remote (that takes forever to type anything into the badly coded web browser) and mediocre version of BBC iPlayer / YouTube apps built in - that will update for 6 months and then stop. Surely the latter is the better option?

It really isn't better at all in my opinion - a TV built with all of those features, still feels underrated compared to a TV attached to a small energy efficient PC. It has the streaming, WiFi, free view, decent keyboard, latest software updates, Google Chrome, YouTube and pretty much every feature a PC has, on a giant TV screen! Plus a small Bluetooth or wife remote with a reduced sized keyboard is plenty good for that setup.) Unfortunately, despite my proposed solution being better than the latest in Smart TV technology, both still provide access to mind numbingly stupid TV content - which we are all more than happy to consume. There appears to be no known cure to this willingness to succumb to 'reality' TV shows and other stupid content, so far - bar the removal of the TV or very strong will power, and only watching a documentaries or insightful content every now and again; The latter has served me well.

In any case, I will rant about TV content and modern media another time, in the meantime I want to make those sales sharks people the core of our discussion. In particular their suggestion of repayment over the long term. It sounds like a very helpful proposition, "the buyer cannot afford, £1000, so we let them pay this amount over 48 months". Here is the sting in the tail: "with interest".

See the image below, for car insurance

See the 3rd column? With installments? You are paying back the loan with interest and the total repayment is xxx amount - more than the figure shown in big lettering. This applies to almost any sort of repayment strategy. Buying a £1000 TV with monthly repayments, is effectively a loan for £1000 - at a very high interest rate, which you pay back. 

The same applies for a mobile contract, if you look at a SIM only deal, you can see talk time is cheap (600 minutes a month, is 10 hours of talking!), so why pay £20 to £40 a month? In reality you are paying for the handset, which when you total the length of the contract, will easily end up in the £1000's - just for owning a bit of metal/glass and plastic - which I assure you, before your contract comes to an end, is going to be a burden on you (slow, laggy, buggy, scratched/damaged) - and you will be itching for the next new phone. You could buy even the most high end handset for half of that price, and put a monthly SIM card in there, for £10 or less.
Monthly repayments really are a loan, I do not need any further examples.

So what is the solution to this predicament?

1. Do not buy crap, you will find your life is pretty complete with a smaller, less featured model of this item. (obviously car insurance or home insurance leaves us little choice). Even if you can afford crap, carefully evaluate this crap and then decide if you really need it.
2. Do not buy crap you cannot afford. Save up and then buy it outright - you might get lucky and see a price reduction/sale over the next few months and also not have to pay the interest - savings galore!
3. Talk to a human being on the phone and arrange an interest free payment option spread out over 2 or 3 months. That should reduce the sting of having to fork out £2000 or whatever in one go, and instead spread it out over 3 months with 0% interest. Not everything is automated, and speaking politely and explaining your circumstances in some cases, may help. I have done this with my car insurance for a few years now, and off course payment was made with a cashback credit card, thereby collecting a nice tidy bit of cash at the end of the year.
4. Borrow cheaply elsewhereIf it is absolutely necessary that you pay for this large expense, get a loan, overdraft, or a credit card with a lower APR than the sales person proposes. Work it out on paper and shop for cheaper lending options.

Research is key. 

In the above insurance example image, the RAC insurance is £2632 paid outright (its a lot of money to pay in one go), and it works out to be £2895 paid monthly, after all installments have been made, a difference of £263 over 12 months. That is almost £22 in interest per month

  • Can you borrow £2600 elsewhere at a cheaper rate? (i.e. on a 0% credit card or a trustworthy friend/family member, overdraft on your bank account (my bank charges me £12 for overdrafts per month - which is cheaper than the £22 interest I would be paying)).
  • Can you dip into your savings? Surely your £2600 savings are not earning you more than £22 a month? in which case it makes sense to let them earn. Otherwise use your savings to pay this cost, as it will save you £263 worth of outgoings at the end of the year - left in savings it will generate far lower. (Hint: you have to earn 10% interest to get £260 returns on £2600 - which is near impossible for average people like you and I).

I honestly believe, we sometimes pay ridiculous amounts for things we could do without, just for the sake of having something new or shiny, be it a TV or a sofa or a new phone. The novelty wears off within a few days, but the (hidden) interest payments continue for a long, long time...

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