MANILA, Philippines -- The concept of hulugan or installment when buying appliances is not foreign to us. Appliance stores such as 680 Home Appliances, Rhine Marketing, and Emilio S. Lim Appliances have introduced in-store financing for years.
Nowadays, however, credit card installment promotions have become much more popular, especially with zero-percent financing and installment fairs in malls.
The best way to buy an appliance, of course, is to save up for it. But there are situations when you may want to pay on installment. You may just recently have married and need to furnish a new home with essential appliances. Financing appliance purchases therefore become a realistic option.
A credit card?s installment plan is one option. Some banks offer personal loans. Others have customized appliance loans. Which is better?
We compared the three installment options by looking at five factors that needed to be considered when choosing the most appropriate financing scheme for appliance purchases.
1. Finance charge
Among the three products, only credit cards offer zero financing. We are referring here to the installment plan since it?s never a good idea to use your regular credit and deferring payment by paying off less than the full balance since the rate can be high as 36 percent a year.
All three usually show the monthly add-on rate and the annual effective rate. As the term describes, the add-on rate, which ranges from 0.88 percent to 1.80 percent, is quoted as a monthly charge. So multiply it by 12 months and you get the annual rate, right? Not so. The effective rate is much higher, almost double, due to other charges and deductions such as processing fees and the way interest is computed. It?s like saying this is how much it really costs ?in effect.?
Appliance loans tend to have higher add-on and effective rates than personal loans, and both generally charge more than the installment plans of credit cards.
2. Other fees
We often overlook other fees when comparing loan products and just focus on the interest rate. As you?ve already seen, annual effective rates take into consideration these other fees and such are a better measure when comparing products.
What are these fees anyway? Credit cards charge an annual fee that you pay with accumulated points or may be waived if you?ve been a good customer. Personal loans charge a processing fee, which they usually deduct in advance. Some appliance loans do away with processing fees.
The monthly amortization is based on the add-on rate and the payment period, usually set as 6, 12, 18, 24, and 36 months. Longer payment periods give lower monthly payments but higher the add-on rates.
If you are after a lower monthly cash-out, opt for the longer period. If cash flow is tight or you?re purchasing several appliances at once, spread out payments over a longer time could be useful. But again, be mindful of the higher interest rates.
Credit cards usually have installment plans of up to 24 months. Personal loans and appliance loans offer the longest payment periods of up to 36 months.
Appliance loan providers often have tie-ups with popular appliance chains, such as Abenson and Anson?s. You select the item you want to buy, submit an application form at the store
along with the required documents. If approved, you pick up your purchase in two days or less.
If you?re a credit cardholder, it may just take three hours to process your application.
You can get a personal loan with your credit card, and through banks or financing companies. Once you get your loan approved and released, you get buy your appliance as you pay.
Banks let you pay online, through their ATM, or over the counter. But you have to pay on schedule if you want to avoid additional charges.
If you choose to pre-pay part of or the entire balance, you can, but you will be charged a pre-payment fee or installment acceleration fee. This can be around a fixed P300-P1,000 or 5.0 percent of the balance, whichever is higher. All lending channels charge penalties for early loan payment. But appliance loans charge the highest.
Based on the five considerations mentioned, credit cards seem to be the best route to go for when buying appliances on installment, especially if it?s there?s real zero-percent interest plan. Just bear in mind that credit card loans have the highest penalties if you defer payment.
The worst channel buying appliances on installment? Ironically, appliance loans.
(This article is from MoneySense, the country?s first and only personal finance magazine. Visit www.moneysense.com.ph for more.)