Buying a house already involves loans that are best described as “pants-wetting”. At that point, there isn’t any real fear in needing more credit for home furnishing. That’s why some people get careless – instead of personal loans or furnishing loans, they go straight for store credit. But you really ought to think it over:
What is store credit?
Many major home furnishings stores (e.g. Courts) have their own credit schemes. We don’t just mean the instalment-free credit card promos that are everywhere – there may be actual in-store financing, where you can take the products home and pay over several months.
Now you may be wondering: what’s the difference between this, and just getting loans from the bank?
It comes down to the following few key factors:
1. Store credit is often easier to get
Home furnishing stores don’t just cater to home owners – they also like to target expatriates, who may need to furnish their rented apartments. And not all foreign workers are highly paid enough to get bank credit, or have comprehensive credit scores.
For that reason, store credit is usually a lot easier to get. Some stores don’t need anything more than a one-month payslip, to decide how much they’ll lend you for your home furnishing needs. Some stores don’t even check at all, and extend credit on the spot.
Courts, for example, extends credit to E-Pass holders, who don’t usually qualify for many bank loan products.
This option is also tempting to over-leveraged homeowners, who may be at the end of their credit right after buying a house.
Of course, there is a price to this, such as…
2. Interest rates tend to be higher for store credit
Due to the higher risk involved, stores tend to charge a higher interest rate than banks.
For banks, the typical personal loan (or home furnishing loan) has an interest rate of around six per cent per annum. Credit cards have an interest rate of around 26 per cent per annum (but credit cards often have interest-free instalment options, for selected merchants).
For in-store credit, interest rates can reach as high as 36 per cent per annum. The high cost is often obscured by low monthly payments, with exceedingly long loan tenures – they can seem deceptively cheap.
3. The right to repossess items
If you can’t make repayments on time, and you use store credits, there is usually a clause that allows them to repossess the items. So yes, people can come to your door to cart off your sofa set, television, dining room set, etc.
Banks, however, will sue you or write off the debt (don’t cheer – that will destroy your credit score, and possibly stop you ever taking a loan again).
Mind you, there’s nothing to say the store can’t sue you as well – it’s just that most of them would rather save time and effort on legal issues, and just take their stuff back; they’ll try to cut losses by reselling the items.
In this sense, failure to pay generally has smaller consequences with the store than with the bank. With stores you just lose the item. With banks, the debt continues to compound, while they drag you to court or declare you bankrupt.
But look, if you think there’s any chance you won’t be able to make repayments for home furnishing, just don’t take a loan. It’s better to sleep on a borrowed mattress for a while, than to add to your sizeable home loan with monstrous debts.
4. Credit score impact
Stores don’t often check your credit score, and they don’t contribute to your credit report either. That means late or missed payments to a store won’t show up on your record.
Banks, however, contribute data to the Credit Bureau of Singapore (CBS). Any late or missed payments will lower your credit score, and your affect ability to take loans above $500 later.
Which of the two should you use?
Due to the high interest rates, it’s almost always more prudent to use the bank. Besides a lower interest rates, banks often have zero-interest rate promotions – the typical deal is zero interest for six months. If you can pay back the loan within that time, you’d pay nothing extra (besides the administrative cost of the loan).
While the consequences of missing payments to a store are much lower, you really shouldn’t be considering credit at all if you suspect that might happen.
Also, here’s another way to get a better deal: ask your mortgage banker.
If you’ve just taken a home loan from the bank, your mortgage banker can sometimes pull strings, and get you an interest-free renovation or home furnishing loan from the same bank.
Store credit should mainly appeal to tenants who are foreigners, and who cannot yet get credit from local banks. In these cases, store credit is better than dealing with shady moneylenders or loan sharks.