Personal finance - WJECCredit cards and hire purchase

Credit cards are another way of borrowing money. Credit cards normally tempt you in with 0% interest or low interest deals to begin with but the offers will stop after a certain time period. The rates of interest that credit cards return to are usually high.

Here is a credit card offer from a bank outlining a typical introductory deal:

Dear Carys,

It’s the perfect time to manage your finances with our longest balance transfer credit card offer.

BENEFITS AT A GLANCE:

• 0% interest for 12 months from account opening on balance transfers made in the first 90 days (3% fee applies)
• 0% interest on anything you buy for the first 6 months from account opening

To keep your promotional rates, you must stay within your credit limit and make your payments on time each month. Credit limits and interest rates vary and are based on your individual circumstances.

REPRESENTATIVE EXAMPLE:

Based on borrowing: £3,000 over 12 months

Representative 20% APR variable

Hire purchase

Hire purchase is a way of buying items where the shop will arrange for a loan company to take an initial deposit from you and you will pay the balance in monthly instalments. This method of buying an item is usually used for buying more expensive items such as cars and bicycles. It is very important to note that this method of buying an item will always be more expensive than paying for the item in one go as you will always be paying some form of interest or charge.

Example

A shop offers hire purchase on the sale of bicycles. The initial deposit in each case is £100 and, dependent on the price of the bike, the monthly instalments vary.

Questions

1. How much would you pay for a bike on hire purchase that costs £480 over 12 months?
2. How much would you pay for a bike on hire purchase that costs £1700 over 24 months?
3. How much is the hire purchase charge for a bike worth £1,700 over 24 months?

Answers

1. Hire purchase = deposit + total of monthly payments

= 100 + 40 × 12

= £580

2. Hire purchase = deposit + total of monthly payments.

= 100 + 24 × 100

= £2,500

3. Looking at the answer from the previous part of the question we see that the hire purchase price is £2,500.

If we take the original price of the bike away from this amount we will get the charge. £2,500 - £1,700 = £800.

If we worked out the hire purchase charge as a percentage of the original amount:

We find out that we have been charged 47% interest in purchasing the bike this way.

Mobile phone deals

Mobile phone deals often work on a similar scheme to hire purchase. The loan is organised through the mobile phone company but, in addition to paying for the phone, you will also be paying towards the services they provide, eg data, free minutes etc. Sometimes you need to pay an initial deposit, then a fixed number of monthly payments.