Think twice before you sign the hire purchase contract on that fridge.
You might save by paying cash for it, even if you have to borrow at a nominal interest rate of, say, 28 percent a year.
This claim was made to parliament's Trade and Industry Committee this week by Johan de Ridder, who has calculated that it is often cheaper to borrow from a small lender and pay cash for your household goods, than to buy them on hire purchase.
De Ridder, who is senior general manager of business development at African Bank, was speaking in his personal capacity.
Taking the example of a fridge costing R2 089, he looked at what you would pay if you bought the fridge from a furniture dealer and paid through a hire purchase contract, and what you would pay if you took out a one-year loan at 28 percent. He used figures supplied by a national furniture retail chain and by a micro-lending company which deducts repayments from the borrower's salary.
The calculation shows that once all the furniture dealer's mark-ups are added in, you would pay R4 434 to buy the fridge on hire purchase - compared to R3 357 if you bought it cash with a small loan repayable over 12 months.
Over the 12 months, De Ridder says, you save R1 077 by borrowing money at a nominal rate of 28 percent a year and paying cash for your fridge.
This means, he says, that using a small lender to finance your purchase is often a rational choice.
Furthermore, he says, micro-lenders fill a real need, lending between R13 billion and R15 billion a year to people who are not getting what they need from the banks.
About a third of the money is used by borrowers to build or expand their homes and another third to finance education. Without these loans, De Ridder points out, some children and students would not be at school or university.
Unfortunately, he says, there are unscrupulous and unethical micro-lenders in the market who give the others a bad name.
Some cash lenders ask interest rates of 300 percent or more a year, De Ridder says.
But though some state intervention is urgently necessary to regulate the exploitative lenders, he says, it would be wrong to "throw the baby out with the bath water" by destroying valuable alternative access to credit.
THE COST OF A FRIDGE
BUYING FROM A FURNITURE DEALER
Cash priceR2 089
plus Dealer's mark-up R611= R2 700
plus Credit mark-upR300
= R3 000
plus service contract feeR273
plus delivery chargesR261
plus credit insuranceR282= R3 816
less depositR300 = R3 516
plus finance chargesR618= R4134
Monthly instalment345
BORROWING FROM A LENDER TO BUY
Amount advancedR2 089
plus service contract feeR201
delivery chargesR261
credit insuranceR136 = R2 686
No deposit
plus finance chargesR671= R3 357
Monthly instalment 280