Don't waste thousands buying credit when you reach the till

Think credit and store cards are expensive? Retail finance deals waste thousands of pounds more, warns Jacqui Canham

Most retailers offer payment plans to customers buying large goods, which allows them to pay over a period of time. So, find your perfect car and you may be given the chance to pay it off over five years for an affordable monthly amount. This might seem like a good idea at the sales counter, pen in hand, thinking about not having to shop around for a personal loan. But by agreeing to such a plan, you could waste a lot of money (see table).

Retailers' payment plans often charge rates of interest well above those of bank loans and even some credit cards. For instance, the average annual percentage rate (APR) on payment plans from double-glazing companies comes in at a scary 20.3 per cent. Deals for kitchens, bathrooms and conservatories will often cost you an extra 15 per cent a year. And you can expect an average APR of around 13 per cent for a new or used car.

If you bought these goods once in your lifetime with credit from your retailer, rather than a personal loan with an APR of 5 or 6 per cent, you could end up spending thousands of pounds more. In-house store cards can be equally costly, with some charging interest twice as high as a reasonably competitive credit card.

"People spend lots of time finding the product that is just right for them: getting their kitchen measured up or taking cars out for test drives," says Andy Smith, personal finance product manager at independent consumer comparison service uSwitch.com. "But they'll take out the retailer's finance plan without thinking twice and end up paying over the odds."

A large number of shoppers are seemingly oblivious to these high charges. Nearly half of the 3,500 British consumers questioned for the Alliance & Leicester research admitted they have used these pricey finance deals at least once when making a big purchase, while more than a third believe they compete favourably with other credit offers on the market.

"If you get a pushy sales person, they may give you the illusion that this way of paying is good value, but they may not explain the financial implications," says a spokesperson from the National Consumers Council. "You need to find a way of borrowing that's right for you."

In fact, there are much cheaper ways to pay off big purchase costs over time. Some retailers offer free credit, but there is usually a short time-span within which you must pay off your purchase, and often the interest you would have paid is factored into the product's price.

For longer payment periods, a better option is a personal loan from a high street or internet lender. There are some good rates available: for loans of £15,000 over five years, Northern Rock offers an APR at 5.6 per cent, cahoot at 5.8 per cent and Amberloan at 6.2 per cent. Similar rates can be found for smaller loans.

Credit cards, if used shrewdly, can also save you money on repayment charges. Several companies offer free credit over set time periods if you transfer the cost of a large purchase made with a different card to them: Barclaycard Platinum offers a zero credit rate for transfers until 1 September 2006, while Halifax One allows free credit on transfers for 12 months.

Some providers allow new customers interest-free credit made on large purchases with their own credit cards: Halifax One allows 12-months free credit, and Standard Bank 10 months. Even if you don't use introductory offers, there are still some credit cards whose APRs are much cheaper than retailers' deals. "Plan ahead before you buy," says Smith. "Have your own payment plan lined up and don't let the saleseman persuade you otherwise."

Steve Dublon: 'The car salesman didn't make this clear'

Steve Dublon lives in Tunbridge Wells and works in client relations. Three years ago, he bought a car from Renault. He agreed to take out the finance deal the dealer offered, which sounded like an affordable way to pay off the cost of the car over four years. What he didn't bargain for was an interest rate of 19 per cent a year.

"I didn't realise how much of the premium included interest payments," he says. "The salesman didn't make this clear."

Steve has since transferred his loan to cahoot, the online bank, which is charging him an annual rate of interest of 5 per cent. He estimates he has wasted around £3,000. Would he use a retailers' payment plan again? "No way," he says.