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In today’s ever changing society the consumer, small business and corporate entities rely so heavily on finance as an everyday occurrence that many different products have become available.  ‘The Finance Maze” series will lead you through a number of different options available in the market from the small through to the large lending products.

Consumer Finance

The consumer uses finance for anything from buying a TV, car or boat through to the home they live in and there are many different ways to procure these items, some more expensive than others. Let’s have a look at each market segment to see where the advantages are.

Example:         purchase of a new Flat Screen TV for $3,000.

Mum and Dad go out to buy a new flat screen TV from a major retailer.  The best way to purchase this item would be with cash as they can potentially get a reduced price with the power of cash. Most large retailers offer a “rental” facility or “no deposit, no interest” facility.

Each of these options can be very expensive as you do not have the ability to get a discounted price using these funding methods. The reason you don’t get a discount is that the interest content in the “no interest” facility is included in the price of the item you are buying.

Option 1 – No Deposit, No Interest

If the purchase price of the new Flat Screen TV was $3,000 you maybe able to negotiate this down to say $2,200 by paying cash. If however you wish to take it over a 2 year period “no deposit and no interest” the price would stay around the $3,000. So you borrow the $3,000 over 2 years with 24 monthly payments of $125 ($3,000 divided by 24) however the interest rate on the above example equates to 31.75% based on a “cash purchase” price.

Option 2 – Rental

The other alternative is the “rental” option and this is also fraught with cost as you pay for the item over a couple of years and then find out that you do not own it at the end of the period and either have to hand it back or pay an amount to own it.

Either of these two options have the advantage that you have a set monthly payment which can be more affordable to most families however the pitfall is that the interest component can be in excess of 30%pa. Even most credit cards are half this annual rate and the other cheaper alternative maybe an unsecured personal loan.

The best idea is to check out all available options in the market for these consumer purchases and if you consider the terms acceptable then use the facilities available to you.

Related posts:

1. The Finance Maze – Operating Leases
2. The Finance Maze – Chattel Mortgages
3. The Finance Maze – Cash vs Finance