Recently I went to Courts to check out some furniture for my home. While browsing, I realise besides having shorter term installment payment plan (IPP) which comes free of charge, there is also the option of 60 month IPP.
For a cabinet costing $899, there is a 60 month IPP option that lets you pay, wait for it...
$39.95 a month. Whattt?
Multiply this figure by 60 and you get $2397. One would be paying 167% more for the product overall. If you annualise this value, you are paying an extra 33.4% effective interest per year!
This is even higher than your typical credit cards' interest rate!
In fact, in the first year alone, you are paying $479.40. That's slightly more than 50% of the original cost. If one is financing their big ticket items such as furniture or electrical applicances costing 4 digit, it is naturally a better option to opt for IPP that lets you pay off over 24 months/36 months, and interest-free IPP are not that difficult to find?
Usually the choice of IPP is made based off managing cashflow (especially when it's 0% interest). It got me thinking about just under what kind of circumstances would warrant the extremes of selecting a 60 month payment plan.
No matter how much I wrap my head around this, it sounds like either bad expenditure management, bad cashflow management or otherwise circumstances forcing one to select such a plan.
A lesson is drawn from this - one should never let debt overrun expenditure management; it is a surefire recipe for disaster.
