Some major stores in Singapore offer "pay later plans" and other in-store credit options. Tempting as these plans might be, you could be better off using your credit card instead.
These days, some stores offer an alternative to paying for big purchases without a credit card. It’s called in-store credit, but it can come under many different names like “instant takeaway plan”, “pay later plan", and so forth.
On the surface, these plans work the same way as a credit card instalment plan. But before using them, make sure to do your homework and read the fine print.
What is In-Store Credit?
In-store credit is different from loyalty programmes or rewards. These schemes typically allow you to take a product now, but pay for it later in instalments.
For example, if you’re buying a S$700 bed, in-store credit will allow you to take it now in exchange for monthly repayments. There may not even be any down payment. This can be tempting, especially for big-ticket purchases such as television sets, laptops, and air-conditioning.
The sales staff will often persuade you to use in-store credit even if you can pay in cash. Why fork out all that money, when you can keep it and slowly pay in instalments?
More importantly, in-store credit often caters to people who can’t get bank loans (e.g. renovation loans), or credit cards.
Of course, businesses aren’t doing this out of generosity. When they let you take a laptop on credit, it’s a big risk; now they don’t have the laptop, and they also don’t have your money. So they typically charge an interest rate on the amount you’ll pay back.
In some cases, the store may retain the right to repossess items, if you don’t finish paying for them.
But I Already Have a Credit Card! Which Should I Use?
When deciding between in-store credit and a credit card, here’s what you need to check:
- The interest rate
- The loan tenure
- Rewards and discounts
- Clauses for repossession
The Interest Rate
The interest rate on a credit card is typically 24% to 26% per annum. You need to check if the in-store credit has a comparable interest rate. In some cases, you will find that in-store credit can exceed 30%. The easier it is to get credit, the higher the interest rate will be.
Some stores can be tricky, and charge different rates for different products.
You may be told the “super storewide easy repayment plan” has an interest rate of just 25% per annum. But hidden in the fine print, it might say that audio-visual equipment has a rate of 36% per annum.
In some cases, the interest rate may even change based on price. For example, one trick is to put higher interest rates on cheaper items (e.g. all items priced below S$500). The store knows it will make more money because customers are more likely to impulse-buy lower-priced items, especially if they don’t have to pay on the spot.
If all these interest rate differences are confusing you, it may be best to stick with your credit card. Otherwise, use the in-store credit only when its interest rate can beat your credit card.
The Loan Tenure
When you use in-store credit, there’s often a fixed repayment period (e.g. five years or 10 years). There’s seldom any flexibility in this, unlike your credit card.
Check for any prepayment penalties. These are additional costs imposed when you try to pay off the debt early. For example:
Say you purchase a S$5,000 air-conditioning system on store credit. The loan tenure is five years, and there’s a prepayment penalty of five per cent of the price. Two years later, you decide to repay the entire remaining debt (however much is left). You would need to pay the remainder of the debt, plus S$250.
In some cases, the prepayment penalties can be even harsher - the store might work out how much interest you would have paid over the course of the entire loan, and insist you pay that as well.
In short, it’s hard to escape paying a hefty interest, even if you were to accelerate the repayment. With a credit card however, you can repay whatever amount you want, without these penalties. (But note that any rollover balances on your credit card are still subject to interest that compounds on a monthly basis.)
So if there’s a chance you could pay off the debt in less time than the fixed loan tenure, always use your credit card.
Rewards and Discounts
Credit cards can give you reward points, cashback, and air miles. In-store discounts generally don’t, except maybe coupons to buy more things in the same store.
All things being equal (same interest rate), you would come out on top by using the right credit card for shopping, since you get additional rewards while still getting the product. Do note that if you choose to use your card's instalment plan, you won't qualify for any of these rewards.
Clauses for Repossession
Credit cards impose a late payment fee (often around S$100) if you don’t pay your bill on time. But when it comes to in-store credit, the results can be more embarrassing. Many stores will have the right to repossess items, especially when it comes to furniture.
This means someone could show up at your door, and drag your sofa, television, or beds back to their warehouse. It can be a depressing sight, and rather crushing if the neighbours or rest of the family are watching.
If you don’t want to run the risk, use your credit card. Besides, you can negotiate to have late fees waived if it’s an oversight. Stores may not be as friendly.