When buying an expensive item, such as a lounge suite or a television set, most people are usually more concerned about the ticket price than the additional cost of financing.
But it is precisely because you are laying out a large sum of money that it should be done as carefully as possible.
Bear in mind there are two transactions to consider, not one: Using the right form of money, and buying the item.
In the accompanying tables we have chosen a well-known banking group and furniture retailer to illustrate the costs of various methods of payment available to potential buyers of a big-ticket item such as a lounge suite.
Two banks within the group gave examples of the types of charges based on "no frills" banking, while charges for the third bank in the group, which offered the full range of sophisticated services, were slightly higher.
However, this is not a comparison of financing rates among institutions or of hire purchase options among the various furniture retailers.
Rates vary among banks and furniture stores and they also fluctuate frequently. All rates shown were correct at the time of writing the article.
Both groups cited rates for a lounge suite costing R3 000, including VAT.
The first point to remember is that even if the cash is available, paying by cash is not free. The cost of withdrawing cash from a branch teller is subject to a charge which, on R3 000, could typically range between R4,80 and R14,25.
The charge would not only depend on the bank, but on the type of account operated at that bank, such as a cheque or savings account.
Taking cash from an ATM is slightly cheaper, but there are limits to the amount of cash that can be taken from an ATM in one day.
The bank approached had withdrawal limits of either R1 000 or R1 500 each day, depending on the subsidiary, which meant two or three separate withdrawals.
Withdrawals from the ATMs of the client's own bank cost between R3,60 and R2 for the full R3 000 and withdrawing from the ATMs of other banks (through Saswitch) cost between R9,60 and R6 for the R3 000 withdrawal.
Service fees on cheque accounts are waived when customers qualify for certain products. ATM withdrawals from savings accounts may be free-of-charge if the customer retains a certain minimum sum of money in the account or holds minimum savings and investments with the bank.
Another option offered by the banks is cheques. The charge for processing a cheque of R3 000 would be between R10 and R14,25. Payment by a debit card offered by some banks would cost less than R8. Again, these charges would be waived in certain cases.
TABLE A
summarises the information and shows the costs of using a credit card on revolving credit and budget. Instead of going to the bank, the buyer of the imaginary lounge suite may prefer simply to walk into the furniture dealer and arrange terms there.
TABLE B
shows an example of what would be offered.
All figures shown include a handling charge of R79. For payment periods longer than three months there is also a R2 stamp duty charge on the hire purchase contract. This does not apply to the three-month, or less, payment period because that is effectively the same as cash and incurs no finance charges.
Over six months the customer pays five instalments of R556 and a final instalment of R553,75. Over 12 months there are 11 instalments of R317 and a final instalment of R308,42. Over 18 months there are 17 instalments of R239,00 and a final instalment of R236,80. Over 21 months there are 20 instalments of R218,00 and a final instalment of R208,60.
If you try to add all these figures up yourself, you will find your totals differ slightly from the "total paid over the period" figure.
That's because this retailer's computer first takes the cost of the lounge suite excluding VAT, then adds insurance, stamp duty and handling charges, and then calculates the VAT.
These are the contract times. But if any account is paid before the full length of the contract, for example over 16 months rather than 18, then the various charges are reduced, pro rata.
There is also a compulsory "protection plan" - insurance on the account - unless you have your own insurance. The group also offers a retrenchment insurance, which is not compulsory. There is a minimum 10 percent deposit.
When comparing the terms offered by the banks - on credit cards - with those offered by the furniture retailers, it should be noted that the interest rate charged on hire purchase agreements is higher than on credit cards.
Insurance is usually required on the items bought on hire purchase and a deposit must be paid, by law.