As retailers continue to vie for consumers attention by offering an ever-increasing number of ‘buy now, pay later’ deals, Payment Protection Insurance lobbyist Sara-Ann Burgess from specialist firm Burgesses is warning people not to be taken in by agreements that could end up costing them more than they bargained for.
The Finance and Leasing Association earlier this year said the number of consumers opting for store instalment credit deals – whereby they put down a small deposit or nothing at all, take their goods home and then pay off the lump sum with interest over a number of months - is steadily increasing, despite the uptake of credit in other areas slowing down.
In February and March this year, shoppers opting for store instalment credit deals grew by 8% and 24% respectively and a month later, the Confederation of British Industry reported April retail sales had risen by 44% - the highest rate since January 2008.
Although confidence to splash the cash via low-cost store deals appears high, shoppers are reluctant to take on higher-value financial commitments. According to the FLA, loans secured on borrowers’ homes fell by 76% in March 09, when compared to the same period last year. No surprise given unemployment now tops 2.2 million.
Sara-Ann is concerned that although a bit of retail therapy is a great moral booster in the short term; in the long term it is another financial burden that will drain resources further. She comments: “We all like to think we’re getting a bargain, but the final cost of the hire purchase deal will undoubtedly end up costing more than if the item had been bought outright.
“What happens if the monthly repayments cannot be met because of a drop or loss of income? The borrower will have spent months paying for something that’s now gone back to the store because of a default on payments, so there’s nothing to show for the early outlay.”
Debt agencies all advise against building up debt levels via store cards and hire purchase deals and agree that low-level debts collectively can prove crippling. Sara-Ann continues: “There’s only a certain amount of money available each month to pay debts and whilst offers to ‘take home now and pay later’ are very tempting, these goods will take-up a proportion of the monthly salary and add to the list of financial commitments such as the mortgage or rent, utility, tax and food bills.
“Anyone with a number of financial commitments should ensure they have the means to continue making their monthly repayments should redundancy occur. Unfortunately, for many people, their savings pots are shrinking leaving them to have to consider other options such as Income Payment Protection.”
IPP is a policy that pays a pre-determined monthly amount to the clamant in the event a salary goes due to accident, sickness or unemployment. Premiums are priced per £100 of benefit and policyholders can choose how much they would like to receive every month if their income is interrupted. The higher the benefit payout, the higher the premium.
Sara-Ann concludes: “In-store credit appears to be the favoured option at the moment, but let’s not lose sight of the fact that if it’s free now, it will cost more later and you will have to have the means to make that repayment, or risk losing it. In comparison, income protection offers the benefits later on. It costs as little as £3.40 per £100 of benefit for unemployment cover with independent providers such as British Insurance, so a person looking to receive £600 for up to a year to cover their commitments would pay a monthly premium of £20.40. This equates to a yearly premium of £244.80 which could in the future return an ‘income’ of £7,200.”
Tags: british insurance, Burgesses, Payment Protection Insurance, PPI