In-store credit and hire purchase
There are many different forms of in-store finance, each offering a promise of buy now and pay later. These are often presented in a way to attract you into taking them out but make sure you know what you’re getting into before you do.
Store cards are a form of credit card. However, you will only be able to use the card to make purchases within the relevant store, or group of stores.
The interest rates on store cards are often high when compared to some other forms of credit.
Rates are usually 20% to 30%, compared to credit cards which typically charge between 17% and 19% APR.
This means that unless you pay off the balance in full each month your debt could quickly escalate depending on how much you pay off.
Store cards can be relatively easy to get, and some stores offer cards at the checkout.
Before you sign up, make sure you can afford the repayments. If you sign up and you have a change of mind, there is a 14-day cooling-off period when you can cancel your agreement.
Store-linked credit cards
These are credit cards which carry the branding of the store in question and that retailer might give you benefits and discounts when you use your card, but they can be used outside of the store too.
These might have longer interest-free periods and similar rates of interest to unbranded credit cards but you still need to pay them off on time.
Some shops will give you a charge card that you can only use in that shop.
You’ll usually get a discount off your shopping. At the end of each month you need to pay off the full balance of your account.
If you fail to do this, you will be charged a late payment charge. It can be quite hard to get a charge card as you might need to have a minimum level of salary and a good credit rating.
Many catalogue brands, online shops and some high street shops offer buy now, pay later credit.
You get finance on an individual purchase and pay it off over time, or shopping accounts where you can keep spending up to a maximum amount (credit limit) each month.
A hire purchase (or HP) agreement is often offered when you buy a car or furniture.
It is a credit agreement whereby you hire the goods with the option to buy them.
Until you make all the payments to the retailer and pay off the final ‘option to purchase’ fee (which might be a nominal amount or something much larger, e.g. (balloon’ payment), you do not actually own the goods.
‘Conditional sale’ agreements work in a similar way but you own the goods once you make the final payment.
Hire purchase agreements are different from ordinary credit agreements as you cannot sell the goods until you own them outright and the creditor can ask you to return them if you do not keep up your repayments.
However, if you have paid more than a third of the total amount the hire purchase company would have to go to court before it could seize the goods.
Anyone offering hire purchase or other types of credit needs to be authorised by the Financial Conduct Authority, so you have important rights should anything go wrong.
Typical complaints include:
- You are unhappy with the quality of goods you have received.
- You are unhappy with the valuation of the goods at the end of the period.
- The terms of the hire purchase agreement were unfair.
However, if you’re unhappy or want to complain your first step should be to contact the firm or store where you bought them.
If you don’t get a satisfactory response within eight weeks you can complain to the Financial Ombudsman Service.
How to get out of a hire purchase deal
You can choose to end a hire purchase deal at any time before making the final payment as long as you have paid half the total amount payable.
To end the agreement, you can either:
- Return the goods having paid at least 50% of the purchase price (voluntary termination) and have no further liability
- Settle early by paying what you owe minus a rebate (early repayment) and take ownership of the goods
You must also inform the lender in writing of your wish to end the agreement. Keep a copy of your letter of termination in case any issues arise later on.
One benefit of in-store finance
The one positive to in-store finance (as opposed to store cards) is that the shops will tend to offer some form of interest-free period, usually three to 12 months, allowing you to buy now and pay for the product later on.
But this is only good if you can manage your money and pay off what you’ve spent within the interest-free period.
What to watch out for
If you do not pay off the balance at the end of the interest-free period, your debt can rapidly mount up.
As a result, you might end up spending more on the goods than they are worth.
The effect on your credit rating
Having too many in-store finance and hire purchase agreements on your credit report can lower your credit rating, even if you’re making your repayments on time.
That’s because lenders might look at the total credit you have available to you when they’re deciding whether to lend.
If you miss any repayments, this will damage your credit rating.
The store might attempt to sell you additional products, such as:
- Warranty insurance, to protect you against the cost of some repairs
- Stain protection insurance, on items such as a sofa or a carpet, or
- Payment protection insurance, designed to cover your repayments if you lose your job or fall ill and can’t work
Not only are these additional products expensive but they might be unnecessary, and the terms and conditions might not be spelled out to as clearly as they should.
Make sure you assess very carefully if you need any of these add-ons, if you do, shop around and compare the level and type of cover as well as prices.
Alternatives to in-store finance
The best alternative to in-store finance (unless it’s 0% finance) is to purchase the goods with money you already have and you might be able to negotiate a discount for cash.
If the goods are something you really want and 0% finance isn’t available, could you save up for them?
If you really must have them immediately, research your options. It might be better for you to take out an interest-free credit card or a personal loan.
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