Rent vs buy for furniture and appliances – do the maths!
SOMETIMES the most disadvantaged members of our community end up paying more for basic goods and services, and I reckon any initiatives designed to improve the financial well-being of battlers deserves a thumbs up.
At one end of the scale some households are in a position to focus on issues like where to invest their spare cash or how to pay off their home loan sooner. These are all important goals to consider. But at the other end of the scale, plenty of Australians face a daily struggle just to meet essential living expenses.
The recent launch of the government's 'Rent versus Buy' calculator is step in the right direction to support financial literacy across our community.
The calculator makes it easy to compare the cost of renting versus buying household goods like electrical appliances or furniture.
It turns out the long term cost of consumer leases can be surprisingly expensive - often far outweighing other finance options.
As a guide, consumer watchdog - the Australian Securities and Investments Commission (ASIC), says it is not uncommon for consumers to pay three or four times more, in some instances six times more, than the purchase price of the leased goods.
Yet the consumer may not have the right to purchase the goods at the end of the lease despite having paid far more than the original purchase price of the item.
That's why it is so critical issue to consider the total cost you're likely to pay - not just the monthly or fortnightly lease payments.
Let's say for example, Phil is in the market for a new fridge. He can't afford the purchase price of $2,499 but if he leases the fridge it will only set him back $20.99 each week over a 48-month lease.
The thing is, over the term of the lease Phil will pay a total of about $4,366 in lease payments - that's almost $1,900 more than if he purchased the fridge upfront. And he still may not own the appliance at the end of the lease.
Alternatively Phil could take out a personal loan to buy the fridge. Even with an interest rate of 15% Phil could own the fridge after just three years and still be around $1,300 better off compared to leasing.
It's a clear example of the way it pays to consider the complete picture before entering into any sort of financial agreement. You can find ASIC's rent versus buy calculator at www.moneysmart.gov.au - click on 'Calculators'.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.