When you don’t have cash to pay for big ticket items, what options do you have?
Between replacing your worn-out aircon, switching out a broken-down fridge, repairing your car and renewing your gym membership, there will be more than a few occasions when you’d need to pay for a big ticket item.
With an array of perks, credit cards are the preferred way to pay for large purchases. However, you should always pay back the amount spent within the statement cycle, lest you incur interest charges.
But what if you need to make an expensive purchase, but don’t have the money available to pay it off at once? Or if the shop you are buying from doesn’t accept plastic? Well, there are still several alternative payment methods you can use, each with their own pros and cons.
To help you make the right choice, here are 4 methods to pay for big-ticket items, ranked in order from best to worst.
Credit Card 0% Instalment Payment Plan: Recommended for Most Purchases
The best way to pay for a big ticket item is to use your credit card’s instalment payment plan.
When you choose this method of payment, your bank pays the entire sum on your behalf. You are then billed monthly instalment payments until the entire sum is paid up.
You may choose the duration of the instalment plan at the point of purchase, subject to the options provided by your bank and/or merchant.
The advantage of this method is you can enjoy 0% interest on your purchase – i.e., you do not have to pay any additional fees on top of the purchase price.
However, be aware that when you sign up for an instalment payment plan, your credit limit will be reduced by the entire sum of your purchase. (This is because, as mentioned above, your bank has paid on your behalf.) But your credit limit will slowly recover as you pay off your purchase.
Therefore, be careful which credit card you use for your instalment plan. Otherwise, you could find yourself unable to use the card for several months or even incur overdraft fees.
Try using a separate credit card for instalment plans for large purchases. This will help ensure you do not run out of credit for your daily expenses.
There’s another disadvantage to using the instalment payment plan: You will not earn reward points, air miles or cash rebates for your purchase.
Yes, you will lose out on the chance to earn what could be a substantial reward, but in exchange, you gain the ability to buy what you need, without having to worry about high interest payments.
One more thing, don’t confuse a credit card instalment plan with store credit. The latter carries high interest rates, and you’re likely to end up paying more than the original price of your purchase.
Balance Transfer: For Merchants Who Accept Cash Payments Only
Some merchants do not offer instalment plans, whereas others want to deal in cash only. (Contractors and some home appliance vendors are notable examples).
In this case, you could try using a balance transfer for the money you need.
The next best thing to a 0% instalment payment plan, a balance transfer is a type of short-term loan with extremely low interest rates.
They are often advertised with 0% interest for a fixed duration (usually from 3 to 12 months), after which nominal interest rates will apply. When you apply for a balance transfer, an admin fee is usually charged. This may be pegged at a percentage of your balance transfer, or a fixed, flat fee.
Because of the inclusion of an admin charge, balance transfers are not truly interest-free. A good rule of thumb is to look for the lowest EIR (effective interest rate; it will be stated somewhere in the brochure or website) you can find when choosing a balance transfer.
More importantly, you should strive to pay back your balance transfer before the interest-free period is up. Failing to do so will incur interest charges on the outstanding amount, matching the prevailing interest rate of your credit card.
Balance transfers are usually tied to your credit card limits, with most banks allowing you to borrow up to 90% of your limit. Once again, it is a good idea to use a fresh credit card for your balance transfer.
Personal Loan: For Smaller Monthly Repayments
A third option for making a large purchase is to apply for a personal loan.
Unlike a balance transfer, personal loans offer longer loan periods, which mean you can make smaller repayments each month. This will be useful if you need to make an expensive purchase, but do not have the cashflow to keep up with a short repayment period.
Note that personal loans do not have an interest-free period. You will be charged interest on the entire duration of your loan. However, the bank will factor the interest charges into your monthly repayments, so you only need to pay a fixed amount each month.
However, personal loans have lower interest rates than credit cards and balance transfers that have exceeded the interest-free period. This makes them a good alternative for big ticket purchases.
Cash Advance: Use as a Last Resort
There’s another option to pay for a big ticket item, but this one must be used with caution.
If your credit card has a cash advance facility, you can use it to withdraw cash from an ATM. (That’s what the PIN that comes with your shiny new credit card is for.)
How much you can withdraw depends on your card’s credit limit, and you can withdraw up to 90% of the limit available to you.
However, banks charge an upfront fee for granting the cash advance – commonly S$15 or 6% of the amount withdrawn, whichever is higher. You also will not earn rebates, points or miles on your withdrawal.
On top of that, interest charges – higher than your card’s prevailing rate – will be charged on the amount you withdraw. It is not uncommon to see credit cards with prevailing interest rates of 25% per annum, charging 28% to 30% per annum on a cash advance.
There is a way to avoid the high interest rates of a cash advance; you have to pay back the full amount by the statement due date. This means you could have as little as 20 days to do so.
Clearly, trying to avoid the high interest rates on a cash advance is a difficult manoeuvre. It is far more likely you will fall short and need to pay expensive interest charges, which could get you into debt.
Even if you do manage to find the funds to pay back the cash advance within the statement period, you will still need to pay the upfront fee. You’rd be better off waiting until you have the money, then making the purchase directly.