Beware credit trap

IT'S three weeks before Christmas and, like a tsunami, advertisements are flooding newspapers with specials, or bargains in the name of the festive season.

These advertisements are surely going to drive consumers into stores because they have some extra cash to spare this time of the year. Some service providers know how gullible consumers can be and have tried and tested methods of attracting them to their products.

The advertisements range from no deposits to a long-term loan with repayment breaks of one to two months that are punted as "Festive Season Specials".

For example, Chevrolet, in a recent advertisement, were offering consumers to purchase its hot Chevrolet Spark with a zero deposit.

Interested consumers would pay an instalment of R1699 a month if they take up this offer, but the catch is that the final instalment balloons to a whopping R41000.

Consumers do not realise they are getting themselves into a tight corner when entering into a no deposit agreement at the time of purchase, because they would have to pay an astronomical amount when the contract comes to an end, or have their car repossessed if they have not raised the required instalment.

For customers who bought furniture based on a no deposit agreement, the trick is that the deposit is normally added onto the monthly instalment, making it difficult for consumers to keep up with payments in the long run.

And the "buy now and pay later" items have a flip side to them at the end of the day.

Manie van Schalkwyk, the credit ombudsman, says consumers often bought big ticket items such as vehicle, furniture and electrical appliances without checking their contracts properly.

He says that in the past seven years the office of the credit ombudsman has had many consumers knocking on its door looking for help after carelessly entering into credit agreements during the festive season.

"With all the specials and promotions at hand, consumers tend to get lost in all the merriment and promises of limited period offers," Van Schalkwyk says.

He says the popular special of "buy now, pay later" which is currently being promoted sounded very convenient, but could come at a high cost.

"Consumers often focus on owning goods and getting what they think is a bargain, then have to pay for their purchases after the holiday season," he says.

He says that according to the National Credit Regulator, the number of active credit consumers had increased to 18.8-million in the last quarter. He says the number of accounts held by South African consumers currently totals 65-million and this was bound to increase in the festive season

Darrell Beghin, of the National Credit Regulators (NCR), concurred with Van Schalkwyk.

He said consumers needed to spend wisely in the festive season and start the new year debt-free.

He said some consumers spent too much at Christmas and fell behind with their debt repayments in the new year.

Beghin said the NCR and the South African Savings Institute (SASI) were running a "Spend Wisely" campaign in which they were focusing on educating consumers about buying on credit responsibly during and after the festive season.

She said they were educating consumers to spend within their means. "Not planning ahead for festive season expenses is one of the main reasons people slip further into debt," said Begnin.

She said while it was easy to get drawn into the marketing and advertising hype and to overspend during the festive season, consumers should avoid borrowing to fund expensive gifts and holidays.

"Putting gifts under the Christmas tree is a good idea if you've budgeted for them, but if not and they are bought on credit, you'll be left with high bills with interest repayments, come 2012," she said.

She said interest rates could be as high as 22.1% on credit cards and store cards and as much as 32.1% on personal loans.

Beghin said these statistics did not include other fees such as service fees, initiation fees and others. "You could still be paying off this year's shopping spree well into the new year, if you do not budget," Beghin said.

Tips:

  • Draw up a festive season budget; don't forget to take your bonus into consideration.
  • Plan how much extra you want to spend over the festive period.
  • Your budget should include rent, lights and water, insurance, debt, school fees, stationery, school uniform, lunch box and bus fare. Remember your next salary will come towards the end of January.
  • Make provision for all unseen expenses, such as donations, unexpected visitors.
  • Buy goods that you need.
  • Stick to the budget which you have set yourself.
  • Avoid getting into debt unnecessarily - it's often better to save in order to buy goods for cash instead of buying them on credit.
  • Shop around for best prices, or wait until they are on a bargain in January.
  • Adjust your entertainment, alcohol, gambling expenses to realise your goal.
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