Much has been said and written recently, on the topic of household debt and excess consumer spending. Malaysian households have discovered to their dismay, that they are amongst the most highly-leveraged households in the region, with a household debt-to-GDP ratio at close to 83%.

According to the Star Online’s article entitled “Spectre of Rising Household Debt” published on 22.7.13, the bulk of Malaysia’s household debt stands at around 44.5%, while 16.8% was in the form of personal loans.

With statistics like these to dampen the spirit of even the most avid consumer, now might not seem like the best time to advocate for purchasing consumer goods on credit. In fact, it is rarely ever a good time to advocate for this, even when financial times are good.

credit-card-readerWe are all-too-familiar with the sad tales of friends, neighbours and relatives who fell headlong into the consumer spending trap and soon found themselves racking up a massive credit card debt which they would struggle to pay off for years and years, or worst of all – having to resort to borrowing money from “Ah Longs” or declaring bankruptcy.

So now, everywhere we turn, we are warned not to buy goods such as electrical items, smartphones, laptops, kitchen appliances, AV equipment, furniture, home décor items and a variety of other things on credit, easy payment or installment plans – because eventually, we could find ourselves drowning in debt after buying things we could not really afford.

It must be noted that these warnings are not only timely, but must be adhered to. It is perfectly true that unchecked consumer spending, which can easily happen when consumers have access to easy payment options, could and usually does lead to financial hardship.

The Golden Rule

The golden rule that applies when it comes to purchasing consumer goods is simple – if you can’t afford to pay cash for it, then don’t buy it. Either do without it, look for a cheaper option online or at another shop, or pursue alternatives such as purchasing a second-hand/used item.

When buying consumer goods on credit makes financial sense

However, there is one scenario in which it actually makes good financial sense to opt for the easy payment scheme, installment payment plan or payment with a credit card. And that is when (and only when) you actually do have the cash in hand already, or can easily afford to pay the installments in full. You can search the credit cards with installment plan here.

Why? Well, there actually are a couple of benefits to purchasing consumer goods on credit, if (and only if) you are one of those who can actually afford it, and if (and only if again) there is no interest charged.

Gadget Purchase Guide for Financial Savvy

 

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If the above criteria are satisfied, it might be worth your while to consider the following points.

Better Cash Flow

Firstly, since there is no interest charged, you are able to use the installment scheme to better manage your cash flow and keep your capital, for investment purposes or even let it continue to earn interest in your savings account.

Affordability

Secondly, the item immediately becomes much more affordable, when the cost is amortised over a 12 month period, instead of having to pay the entire amount upfront.

Regulate your Expenses

Thirdly, the installment scheme also helps you to regulate your expenses on consumer goods. Using smartphones as an example – as we all know, smartphone manufacturers such as Apple and Samsung, make it a practice to release an upgraded model every couple of months. We are easily tempted to join the craze to upgrade…especially when we are dazzled by all those wonderful new features being advertised!

The temptation to just go out there and get yourself the latest one, could be too difficult to resist as we are bombarded with advertisements encouraging us to buy. Well, here’s the good news – if you are still paying for your old phone on credit, it’s simply not yet time to upgrade to a new one (regardless of what the smartphone manufacturers are telling you!).

Credit Card Rewards

Lastly, paying for consumer goods on credit even though you have the cash and can pay off your credit card bill in full at the end of the month, allows you to collect reward points on your credit card that could then entitle you to cash-backs, free gifts, or other rewards.

The more expenses you put on credit, the more points you rack up, and the more lucrative rewards you can get. But remember the golden rule which applies again – avoid credit card interest accruing at more than 8% as a result of only being able to pay the minimum payment, at all costs!

The rewards are not worth it, if you can’t pay your credit card bills in full every month. You would be better off waiting until you have the cash to buy the item.

Final Tips

Final tips and suggestions include shopping around at various retail outlets and online to find the best easy payment or installment scheme, as well as analyzing your intended purchase carefully against your personal budget and upcoming commitments over the next month and next year – to accurately gauge whether you can really afford your intended purchase.


KCLau
KCLau

Personal finance author and trainer

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