Friday 11 November 2005

How DO they justify it?

We’ve reported in this column on numerous occasions on some of the store credit options available to shoppers in Botswana. We’ve reported on the outrageous activities and charges applied by some of the less appealing micro-lenders. We’ve also reported on the rates charged by the stores around the country. Some of the rates charged have been truly staggering.

A few weeks ago we were stunned to find what is perhaps the highest ever store credit charge we’ve ever seen. The item in question was a budget DVD player. If you bought it for cash you would need to pay just P399 which is actually pretty cheap. Sounds like a bargain and it probably is!

However, if you were to opt for the store’s own credit scheme you would pay somewhat more than P399. Firstly you would need to pay a deposit of P95. Then, every month for 2 whole years, you would need to pay back P88. At the end of the 2 years you would have paid back a staggering total of P2,207. Remember that this is for an item that costs just P399 if you have the cash. For those of you without a calculator to hand that’s an annual percentage rate of 227%!

We at Consumer Watchdog cannot recall ever having seen an APR that high ever before, anywhere in the world.

When we mentioned these figures the store contacted us and disputed our figures, saying that we hadn’t taken into account the optional elements of the charges and were being unfair to them. Our response was that they had published the very figures we had used and we felt that our arithmetic was therefore correct.

So why do some stores charge such high interest rates? To make money of course!

However, to be fair to the stores (yes we are always fair, despite what some people say) they will say that they are forced to charge such high rates to protect themselves against the large proportion of customers that fail to make payments.

So what’s our response to that? The reason so many customers fail to keep up with the payments is that they are so high!!!!! It’s a self-fulfilling prophecy. The higher the repayments, the more who will default, thus requiring the rates to be made even higher etc etc etc.

Surely if they lowered the cost of their credit schemes fewer customers would default?

The good news

Yes, there is good news. Not all stores charge 227% interest rates!

In advertisements last week we found the following.

Hi Fi Corporation will sell you a laptop computer for P3,699 for cash, but on their 2-year credit scheme you’ll pay back a total of P7,378 which is an APR of 50%. Still a little on the high side but a whole lot better than 227%!

OK Furniture have a fridge for sale for cash at P1,049. If you choose to pay over 2 years, you’ll pay back a total of on P1,526, an APR of only 23% (one tenth of the 227% figure!).

Best of all if you go to Game and like the TV they are selling for P1,199 for cash you can get it on 2-year credit for P1,536, an APR of only 14%! Searching through the Game literature we couldn’t find any APR higher than about 16%.

We confess that we are completely unable to explain how one store can get away with demanding 227% and another just a few hundred meters away can charge 14%.

Incidentally, before any angry store manager writes in and complains about our comparisons, yes we do know that rates vary according to the value of the item (cheaper items usually attract higher rates). We also know that some figures include delivery and insurance but that’s rarely made crystal clear in the advertisements. And anyway, Mr Store Manager, if you give figures in public advertisements that suggest you charge 227% in interest and you in fact don’t charge this amount we suggest you get a new advertising agency!

So what are our lessons for consumers?

Don’t buy on credit unless you absolutely must. If you can live without what you want for a few months, put the same amount you would have paid each into a high interest account and earn interest on it. That way the bank will actually help you pay for whatever you want!

Back to the DVD we mentioned at the beginning of the article. Instead of going for their credit scheme just put aside the P88 they would make you pay each month into a bank account. In less than 5 months you would have saved the total cash price of the DVD player. Yes, FIVE months instead of TWENTY-FOUR.

If you really DO need to buy on credit then shop around! Identical items can vary enormously when bought on credit. For almost exactly the same total repayment you could get a DVD player worth P399 or an entire home theatre system worth P1,899.

Check your budget. Yes, it’s very boring advice but please check first whether you can afford the repayment and whether you are really confident that you will be able to afford them every month. These credit schemes make no allowances for unplanned funerals, car repairs or school fees. Do you really want to sentence yourself to 2 years hard labour paying back a loan?

Do you really need it anyway? Won’t your current fridge survive for another few months? Patch it up and put the money aside in a savings scheme!

This week’s stars!

  • Dave at Skip Hire for being efficient and helpful
  • Gaborone Cricket Club for organising a fantastic fireworks event
  • Lyndsay at HRMC for being a star

No comments: