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A guide to buying goods on finance
Unfortunately, we don’t always have the money we need to make the purchases we want. This is where finance agreements come in. Buying goods on finance can give you access to products you otherwise couldn’t afford.
But understanding your options when it comes to finance can be tricky. It’s easy to get lost in the jargon, and how do you know which types of agreement – if any – are right for you? To help ensure you’re clued up on this topic, here’s a brief guide to buying goods on finance.
What are finance agreements?
Many retailers now give customers the chance to buy goods on finance. This can be anything from clothing and electronics to furniture and cars. Finance agreements involve you borrowing money, but they’re not the same as a personal or short-term loan. Unlike with these loans, the money you borrow never enters your bank account. Instead, it goes straight to the retailer you’re buying the products from. You then have to pay the money back, typically on a monthly basis.
It’s not usually the retailer themselves that lends you money. These companies tend to work in partnership with lenders and it is the lenders that you borrow from.
Some finance agreements require you to pay a deposit, but not all do. If you do have to pay a deposit, this will come off the total sum that you’re borrowing.
It’s really important to pay attention to interest rates when you’re thinking about buying goods on finance. Some agreements are interest-free, while others include interest charges. If interest is applied, this can mean you end up paying significantly more for a product than you would if you bought it outright.
In most cases, you’ll have to go through a credit check in order to buy items on finance.
Buy now, pay later
Many finance agreements are promoted on a ‘buy now pay later’ basis. This type of arrangement means you don’t have to start making payments for the goods you buy for a set period of time. It varies depending on the retailer and deal, but these payment-free periods usually last for around six months to a year.
Store cards operate in the same way as credit cards, but you can only use them to buy items from within that particular store or group of stores. It’s important to be aware that the interest charged on these cards can be much greater than regular credit cards, so unless you pay the balance in full each month, this can cause problems.
Hire purchase agreements are most commonly offered with cars or furniture. They involve making regular payments over an agreed period of time. You don’t actually own the product until and unless you make your final payment, so you’re essentially hiring it for the duration of the agreement. This means you can’t dispose of or sell the product without the lender’s permission until you have made the last payment.
Personal contract hire
Personal contract hire (PCH) is a type of car leasing that means you never own the car. You pay monthly rentals and at the end of the contact, you hand the car back.
Personal contract purchase
Also a type of agreement used for cars, personal contract purchase (PCP) is similar to hire purchase, but at the end of the deal you have three options. You can return the car, pay the resale value and keep it or use the resale value towards purchasing a new one.
The disadvantages of buying goods on finance
Finance agreements can undoubtedly be a convenient solution if you want to buy something that you can’t afford outright. However, there are a range of potential disadvantages to consider. For example:
- If interest is applied, you will end up paying more for the product than if you’d bought it outright.
- If you don’t keep on top of your repayments, you could face rapidly mounting debt.
- Any missed payments will damage your credit rating.
- Having too many finance agreements in place can harm your credit rating.
- Certain finance agreements include restrictive terms and conditions. For instance, if you enter into a PCP or a PHC arrangement for a car and you exceed the agreed mileage, you are likely to face charges at the end of the deal. You will also face charges for any excessive wear and tear to the vehicle.
Alternatives to finance agreements
If you can wait, it’s often better to save up and buy products with your own cash rather than using finance agreements. This ensures you won’t have any interest to pay, and you won’t have to commit to making regular repayments. If you get into financial difficulties, you also have the option of selling the product to recoup some of the money.
If the goods you want are too expensive to buy in this way, could you consider going for cheaper alternatives? For example, maybe you could choose a less expensive brand or get the product second hand rather than brand new.
The important thing when it comes to finance agreements is to research your options carefully so that you can make informed decisions.
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