Old-fashioned hire purchase-style deals have become today’s socially acceptable way to buy big-ticket items
Forget contactless payment and sending money by mobile; middle-class consumers are increasingly opting to buy everything from sofas to dishwashers through a very old-fashioned form of payment: in-store credit.
Latest figures from the Finance and Leasing Association show that store instalment credit – the modern version of hire purchase – rose by 25% in the second quarter of 2012 compared to the same period last year.
In contrast, the amount borrowed through credit cards and personal loans was up only 1%. It attributes the surge to the economic downturn.
Hire purchase – once popularly called the “never-never” – is the legal term for a contract in which the goods are hired to the buyer for a specified period during which they will have to pay weekly or monthly instalments. The goods remain the property of the lender until the HP agreement has been completed in full. Hire purchase is still used but most retailers have now replaced this with store instalment credit. The finance deals are provided to retailers by banks like Barclays and Santander and non-banking groups such as the Home Retail Group and these work in a similar way to hire purchase. The crucial difference is that, unlike with HP, the finance is not secured on the goods – so once you have bought them, you own them.
This sort of credit is heavily pushed by stores specialising in expensive items, such as sofas, which are bought infrequently. More than 2.6 million households now buy furniture this way and more than 660,000 use it to finance electrical goods. Ikano, which provides the deals for major furniture retailers DFS, Harveys and Ikea, also reports a rise.
Professor Josh Banfield, director of the Centre for Retail Research, says there is a trend towards middle-class consumers buying more on a “buy now, pay later” basis: “It’s seen as an acceptable way to pay: they even talk about it in the same way they boast about shopping in Aldi.”
Louise Brittain, a council member of R3, the trade body for insolvency professionals, agrees there has been a shift in attitude towards HP and in-store credit. She says the change in outlook started with cars: professionals began taking out lease arrangements, which has filtered down to the uptake in in-store credit on household items.
“It used to be seen as the option for poorer people who couldn’t afford to buy something outright,” says Brittain. “But that’s changing. Most people haven’t got as much money, the best deals on credit cards and personal loans are harder to get, and in-store finance deals have become more competitive.”
Furniture giant DFS recently launched two new upmarket ranges – House Beautiful and Country Living – named after the very middle-class lifestyle magazines. “One thing we discussed before launch was whether it was less likely that customers who were attracted to these aspirational ranges would buy on hire purchase,” says Ian Filby, chief executive. “We’ve seen just as many customers who buy this range take up the finance as we do with our other ranges.”
HP and in-store credit tends to have less stringent credit checks than cards and loans. Although retailers claim they only offer deals to those who can afford them, they are seen as less rigid and also last longer. While the longest interest-free deals on credit cards for purchases extend to 16 months, interest-free hire purchase can last for up to five years. Filby denies this causes more problems: “We have a very, very low default rate.”
The easy application process encouraged mother-of-two Carolyn Neale, 35, and her husband, James, 36, a project manager, to buy two sofas last month for £950 using an in-store finance deal.
“We’ve chosen to pay over three years, at around £20 a month,” says Neale, who lives in Chelmsford, Essex. “I’m at home with the children, so it’s hard to get credit card deals and personal loans at the best rates. Applying for the store finance was a lot less hassle.”
For others, it’s the fact that there is often no incentive to pay upfront: shops frequently charge the same amount whether you are paying with cash, credit card or through in-store finance.
Business owner Alex Stevens, 42, has nearly finished paying off his £960 sofa on hire purchase. “My thoughts were ‘Why not let the retailer take on the debt?'” he says. “A couple of years interest-free seemed a no-brainer, even though I could have paid in cash.”
Stevens, who is single and lives in London, had 12 months payment free and now pays £80 a month: “It’s effectively 24 months interest-free. It feels different to card debt. With cards, you’re given a spending limit for buying lots of things. With HP, it’s a fixed arrangement for one product and is easier to budget for.”
However, Tim Moss, head of loans at comparison site Moneysupermarket.com points out that deals do have to be paid off within the interest-free period: “Otherwise, they jump sky-high and SVRs of 23.9% and over kick in.”
The Consumer Credit Counselling Service, which says that the majority of people it advises on debt problems are middle-income home owners, often working in the professions, urges those considering using HP to be cautious. Research for The Observer by the charity reveals that the average hire purchase amount owed per client in the £20,000-£29,999 salary group is £5,270.
But those earning £30,000-plus net, take an average of £7,604 out in hire purchase. These figures include everything from car finance, to interest-free deals, to the lower end of the market – the pay-weekly store deals, operated by firms such as BrightHouse.
Una Farrell, for the CCCS, says: “Hire purchase deals can sound great, and for some people they work. But if you lose your job you could end up in a situation where an interest-free deal ends before you’ve made a single instalment.”
The message, she says, is that it’s best to save up. “Even if there’s an emergency and your washing machine breaks down, don’t panic-buy on HP. See if there’s an alternative – can you get it repaired? Can you get one for free on a local website? Don’t consider whether you ‘need’ 36 months interest-free; consider whether you need the item in the first place.”
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