Payment plans are nasty

One of the all time evil concepts which has snuck its way into our lives is the ‘instalment plan’. Instalment plans allow the customer to pay for a good or service over a pre-determined period of time. These plans can be offered on such items as furniture purchases, car purchases, mortgage payments, credit card repayments, even grocery bills and more. What instalment plans do to personal budgets, is skew the figures. It means that the sums on your budget are not a true reflection of what is owed.

Paying off a debt over a period of time is in most cases the only solution to being able to afford property. Buying property is the most fundamental step in acquiring assets. However, as property prices increase, entering the property ownership market becomes less affordable to a large number of people. The financial institutions have come up with innovative solutions. Some of these are really of no value to the purchaser wishing to own property. For instance there is a mortgage option available where only interest is being paid. This is to try and keep the repayments at a more affordable level. It does mean however, that the capital amount of the purchase price is never touched. I presume the rationale behind this concept is that at least one would be able to make some money on the increased value of the property when selling.

Repayment plans are really at their most evil when they are used to pay for such items as groceries or clothing. In these instances, goods are consumed immediately, but paid for possibly only a year later. You might not even have made the connection that you are paying for a purchase in this way. It is so easy to acquire a store card from a supermarket or clothing chain. And it is even easier to pay the amounts owed on the card in instalments. Borrowing money in this way is made so easy. You only need to pay the minimum amount due. The amount due is the total amount owing, divided by the number of months the store has offered you as terms and that becomes the minimum payment. In business terms it means that your supermarket or clothing chain’s main business is now to lend money rather than to sell goods.

At the beginning of January 2007 I was phoned by my bank on at least four occasions. Even my bank had this January sale hype. It’s a very British institution, the January sale, which actually starts in December. The sales staff were trying to persuade me to upgrade my basic bank account to a premium account. One of the benefits to me would be that for one whole year I would not need to pay interest on outstanding balances on my credit card. Nobody had bothered to check that my instructions to the bank were to take the full amount due on my credit card off my current account every month. With other words, I was not incurring any interest in the first place. With the premium account I would also be entitled to a whole bunch of benefits, which in fact would not be of benefit to me, such as extensive travel insurance, as I didn’t need any of them. The fact that the bank threw a resource of four sales staff at me, is an indication that the bank rather than me the lowly customer, was going to benefit from this exercise. As an aside, this is the same bank that made me grovel for three months, before they were prepared to give me an account when I moved to the UK in 2006.

Four different call centre staff were trying to sell me a service which would have encouraged me to borrow more money to pay for more consumer goods on the never never. To explain this using a really easy example. I would use my credit card to buy, say, a bottle of instant coffee, and pay it off at 30p per month over the next six months. However, the following month I shop for groceries again. This amount gets added to the credit card amounts owing – remember only one sixth of the previous month’s amount was paid – and the new total owing divided over the pre-determined instalment period such as six months in this example. This could mean that the next month I only pay off 20p off the amount due on the coffee. I would have consumed the contents of the bottle within two months. But would still be paying over many more months for those coffee grains that were a distant memory. In fact you could be paying for that coffee over three years for instance at ever smaller instalment amounts.

Paying for something way beyond the consumption date, is one of the biggest contributors to the fact that individual people have such large debt burdens. Because what happens next, after the credit card has been maxed out buying consumer goods, is that long term loans, to cover the short term loan of the credit card, are taken out. This means that the bottle of instant coffee, as an example, is still being paid off in ten years time. Eliminating these instalment plan deals on consumer goods is the first step to financial health. Cut up the store cards now! If you need a store card to buy something, then you can’t afford it.