Hidden interest rates loom in HP agreements

Seasonal interest-free offers may seem tempting but if the terms are broken, the consumer may find their purchase has cost them dearly, writes Laura Slattery

At Christmas time, there's no need to take a hit upfront. "Buy now, pay later" the advertisements screech. And pay later we do.

We can walk into an average shopping centre with a fully abused overdraft and an over-the-limit credit card, yet still emerge several shopping minutes later with a 32-inch LCD flatscreen TV and a 40-inch smile, happy in the knowledge that we can spread the cost over 36 easy monthly repayments.

It's only fair that once we have completed the complicated, wearying mission of purchasing gifts for all kinds of people claiming to be our friends and family, we should buy a little something for ourselves too. Isn't it?

But shopping on credit has long-term repercussions (apart from the back injuries sustained from hauling home cinemas back to the car park).

In-store finance deals that allow people to pay for items such as electrical goods, computer equipment and furniture in instalments often come with a price tag of their own.

"More often than not, credit and hire purchase deals offered at the point of purchase do work out more expensive," says Ms Mary O'Dea, consumer director of the Irish Financial Services Regulatory Authority (IFSRA).

"Personal loans would often be better value, as they are more flexible and do not have as many associated fees and charges."

Point-of-purchase credit agreements, signed purely on the basis of convenience, tend to be inflexible. "If your circumstances change, there may be little you can do to reduce your payments or extend the terms," Ms O'Dea warns.

Take, for example, the home of frenzied pre-Christmas catalogue browsing: Argos. Six months' interest-free credit is available to consumers who spend more than €275, according to an Argos flyer brandishing the catchline "making shopping more affordable".

The six-monthly repayment plan works like a typical hire purchase plan for a car: most of the repayments are incredibly low, then the final one is a comparatively massive "balloon" payment.

According to Argos, consumers who buy goods worth €275 under the credit option must make five monthly payments of €8.86 and a final payment in the sixth month of €230.70.

If they do, they get away interest free. If they don't, they become trapped in a four-year repayment plan with an interest rate of 25.9 per cent APR.

Under this, they continue paying €8.86 per month for the rest of the four years, paying a total of €425.28 for goods worth just €275. The total cost of the credit is €150.28.

Of course, this punitive cost is wholly avoidable as long as consumers repay the full value within the six months.

But structuring repayment plans so that there is a balloon payment at the end of the 0 per cent interest period makes it more likely that consumers will struggle at the final financial hurdle and break the terms of the interest-free deal.

A safer, but less convenient option for consumers might be to apply for a credit card with a 0 per cent rate on new purchases for six months.

This year, IFSRA has received 300 requests on its consumer helpline for information on hire purchase (HP) and credit sale agreements.

With HP deals, consumers do not actually own the goods until they make their final payment.

"Goods can be repossessed and various fees and charges applied if they do not meet the repayment criteria, and the goods are not yours to sell," explains Ms O'Dea.

But in many cases, consumers don't understand that they are being offered a HP deal rather than a straightforward loan, Ms O'Dea adds, because they become caught up in the purchase of the goods rather than the terms of the credit.

It's hardly surprising that people are confused. Even basic information on credit agreements is sometimes hard to come by on shop floors, and sales staff usually have little training in financial matters.

Retailers earn valuable commission from their finance partners on any credit agreement they manage to foist on to cash-strapped consumers.

A "typical" APR - annual percentage rate of interest - may be cited on a leaflet or poster, but there are no clear rules for the formulae that finance providers use to come up with these "typical" percentages.

All of this makes it more difficult to follow IFSRA's advice and "separate the credit decision from the goods decision".

At least Argos has the grace to spell out how its credit option works on its readily available information flyer, which is more than can be said for some other retailers.

In electrical goods store Dixons, posters for its Easiplan Finance scheme clearly show the APR charged is 21.8 per cent. But an example showing the cost of credit is unhelpfully expressed in sterling rather than euro.

The Irish Times took Dixons' advice and asked staff in its Jervis Street branch in Dublin for more details. Unfortunately no information leaflets showing the terms and conditions of Easiplan Finance were available.

A sign for a Packard Bell computer on sale for €1,099 advertises an Easiplan repayment schedule of €43.09 per month, with no mention of how many months the sum would continue to disappear from customers' bank accounts - an important detail.

One staff member said that all credit deals lasted for four years. On this basis, repayments on the computer would amount to €2,068.32 over four years, meaning that the cost of credit is €969,32 - just €130 less than the cost of the computer itself.

These credit options are expensive because the interest rates charged are high, and also because consumers are often forced to repay the loans over long terms.

For instance, people buying Dell computers online are offered the chance to spread their repayments using a Permanent TSB finance plan over 36 months, at a rate of 16.9 per cent APR.

The option of paying back the loan over 24 months and avoiding racking up quite so much interest was withdrawn this year.

Retailers and their finance provider partners know that longer repayment terms mean even greater profits for them. As they give the illusion of low, easily affordable, monthly repayments, longer credit periods are also more likely to encourage impulse buys.

IFSRA's advice to consumers: don't rely solely on the APRs cited. They may sound similar to credit card rates or only a couple of percentage points higher, but the long, fixed repayment terms mean the total cost of credit is usually much higher.

Ms O'Dea says that consumers should ask the agent for the total cost-of-credit figure, then compare it to other finance options, rather than rushing into an expensive convenience.

Consumers confident of avoiding retail temptation over the Christmas season, but prone to moments of envy during the January race for 05 car registration plates should take note: IFSRA's words of caution on point-of-purchase credit apply to the garage forecourt too.

The IFSRA guide to personal loans and credit is available to download from the information website www.itsyourmoney.ie, by calling its consumer helpline on 1890 777 777, or from its information centre at College Green in Dublin.

Other Christmas shopping hazards to avoid

Store card borrowing

The Arnott's store card has an interest rate of 16.9 per cent APR. Marks & Spencer's is even more expensive, charging 18.9 per cent APR.

There's no stamp duty on store cards, and you might be invited to the odd VIP night of discounted shopping, but these interest rates mean that even medium-term borrowing on store cards is a very bad idea.

Unauthorised overdrafts

If a credit or debit card purchase plunges a current account into an unauthorised overdraft or results in the person exceeding the agreed credit limit on an authorised overdraft, surcharge interest rates kick in, ranging from 6 to 9 per cent.

This could make for a depressing January for shoppers who don't play safe with plastic.

Online scams

Beware of emails offering credit service. Many unsolicited emails are fraudulent, the Irish Payment Services Organisation warns. Click on the padlock or key icon to ensure that the retailer has an encryption certificate.

For more advice on how to ensure you are in a secure environment when entering card details online, visit www.safecard.ie.