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Insurance Companies
Another possible source of finance is available to anybody who has a life assurance policy on which he has been paying premiums for a number of years. Endowment policies and whole-life policies (see Chapter 12 on insurance) acquire a `surrender value' after a certain period. The surrender value is the amount of cash that the insurance company is prepared to pay to the holder in exchange for cancelling the whole of the insurance contract. No further premiums would be payable on the policy and no further benefits could arise on it.
Commonly the surrender value of a policy that has been running for seven or eight years or less will be lower than the actual net cost of the premiums on it to date. After ten years the surrender value will usually be significantly higher than the cost of the premiums - especially will this be the case if the policy was a 'with-profits' one (see Chapter 12).
As an alternative to surrendering a policy for cash it is usually possible to obtain a loan from the insurance company itself on the security of the policy. The amount of the loan will be restricted to the current surrender value. The interest rate charged is usually rather lower than on a loan from other sources because the insurance company derives more revenue from a policy holder who continues to pay premiums (although taking a loan on the policy) than from one who surrenders for cash and ceases to pay premiums.
Notional abatement of cost of loans Inflation
When assessing the pros and cons of seeking finance for an immediate purchase as compared with deferring that purchase until you have saved up enough money to pay cash for it, you should not only compare the costs of the various methods of finance, but also the possible costs of deferring purchase. In other words, you should consider the likely course of inflation - the probable rise in price of the article to be bought between the present time and the time when cash resources will be sufficient, abated by any interest earned on cash currently saved. You should also allow for the probable rise in your money income during the period of deferment.
For instance, if hi-fi equipment priced today at £249 were to rise in price to £286 in one year's time, it might be argued that it is better business to acquire it immediately on hire purchase at a total eventual hire-purchase cost of £288, since to do so would give you a year's use of the equipment for only £2.
It could also be argued that were the price of the equipment to rise by only 11% in the year to £276.50, it would still pay to buy it today using the finance of a personal bank loan at a flat interest rate of 11%.
In times of inflation it should also be borne in mind that, provided income rises in line with inflation, the real burden of making the contractual fixed repayment instalments becomes less as time passes, since each instalment represents a smaller fraction of income. In inflationary conditions borrowers make a gain, while lenders of money make a loss.
Bank Budget Accounts
Two of the big banks offer a budget account facility to customers. This should not be confused with a shop budget account, although the principles are very similar. With a bank budget account the customer has to make a detailed estimate of all the big items of household expenditure he expects to have to pay over a 12-month period, and add them together. Each month a sum representing one-twelfth of the total annual expenditure is transferred from the ordinary current account to a special budget account opened in the customer's name. He will be given a separate cheque website for use on this account... see: Bank Budget Accounts