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Other Sources of Credit
To accept the first form of credit that is offered by a supplier of goods is unwise without first checking that the cost of that credit is reasonable as compared with other sources of credit. In many cases it may be more economical to obtain a loan in money and to pay cash for your purchases. Advantage can then sometimes be taken of any cash discounts available, and in the case of expenditure on such things as road fund licences and rail season tickets you can often save more money over a year by taking an annual contract instead of a daily or weekly one, than it costs in borrowing the money for the purpose.
Example
Annual outlay
Daily rail fare from A to B is £l.74 (assume
5 days per week for 49 weeks less 1 bank 407.16
holiday per month)
Weekly ticket costs £7.40 for 49 weeks 362.60
Monthly contract costs £28.40 x 12 (but £21 319.80
is saved by omitting the month of
holiday and taking a weekly ticket for the odd week)
Quarterly contract costs £81.80 x 4 327.20
Annual contract costs 294.00
Personal bank loan for £294 at 11% flat for 1 year
326.28
Purchasing an annual contract with a personal loan is therefore cheaper than a daily ticket, a weekly ticket, or a quarterly contract, though not cheaper than a monthly ticket, modified for the annual three-week holiday.
Comparative Costs
All purchases made under any form of credit arrangement are virtually a borrowing of money. Of the methods so far outlined different purchasers may find that some one method has special features that happen to suit their purposes. Nevertheless, one should be aware that there can be quite a wide disparity in costs.
Type of credit
Interest-free credit Credit cards
Charge account
Credit sale
Shop's budget account Hire purchase
Range of true interest rates per annum (2000)
Nil (or discount forfeited)
Nil for about... see: Comparative Costs