What are the best ways to pay for big-ticket items in Singapore?

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WHEN YOU DON'T HAVE CASH TO PAY FOR BIG-TICKET ITEMS, WHAT OPTIONS DO YOU HAVE? 

Between replacing your worn-out aircon, switching out a broken-down fridge, repairing your car, and renewing your gym membership, there will be more than a few occasions when you'll need to pay for a big-ticket item.

With an array of perks, credit cards are the preferred way to pay for large purchases. However, you should always pay back the amount spent within the statement cycle, lest you incur hefty interest charges.

But what if you need to make an expensive purchase, but don't have the money available to pay it off at once? Or if the shop you are buying from a shop that doesn't accept plastic?

Don't fret, there are still several alternative payment methods you can use, each with their own pros and cons. To help you make the right choice, here are 4 methods for paying off big-ticket items, ranked in order from best to worst.

1. CREDIT CARD 0 PER CENT INSTALMENT PLAN: RECOMMENDED FOR MOST PURCHASES

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The best way to pay for a big-ticket item is to use your credit card's instalment payment plan.

When you choose this method of payment, your bank pays the entire sum on your behalf. You are then billed monthly instalment payments until the entire sum is paid up.

You may choose the duration of the instalment plan at the point of purchase, subject to the options provided by your bank and/or merchant.

The advantage of this method is you can enjoy 0 per cent interest on your purchase - i.e., you do not have to pay any additional fees on top of the purchase price.

However, be aware that when you sign up for an instalment payment plan, your credit limit will be reduced by the entire sum of your purchase. (This is because, as mentioned above, your bank has paid on your behalf.) But your credit limit will slowly recover as you pay off your purchase.

Therefore, be careful which credit card you use for your instalment plan. Otherwise, you could find yourself unable to use the card for several months or even incur overdraft fees.

Try using a separate credit card for instalment plans for large purchases. This will help ensure you do not run out of credit for your daily expenses.

There's another disadvantage to using the instalment payment plan: You will not earn reward points, air miles or cash rebates for your purchase.

Yes, you will lose out on the chance to earn what could be a substantial reward, but in exchange, you gain the ability to buy what you need, without having to worry about high-interest payments.

One more thing, don't confuse a credit card instalment plan with store credit. The latter carries high-interest rates, and you're likely to end up paying more than the original price of your purchase.

2. BALANCE TRANSFER: FOR MERCHANTS WHO DO NOT OFFER INSTALMENT PLANS

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Some merchants do not offer instalment plans for big-ticket items (contractors and some home appliance vendors are notable examples).

In this case, you could try using a balance transfer for the money you need.

The next best thing to a 0 per cent instalment payment plan, a balance transfer is a type of short-term loan with extremely low-interest rates.

They are often advertised with 0 per cent interest for a fixed duration (usually from 3 to 12 months), after which nominal interest rates will apply. When you apply for a balance transfer, an admin fee is usually charged. This may be pegged at a percentage of your balance transfer, or a fixed, flat fee.

Because of the inclusion of an admin charge, balance transfers are not truly interest-free. A good rule of thumb is to look for the lowest Effective Interest Rate (EIR) when choosing a balance transfer. It should be stated somewhere in the brochure or website - banks and financial institutions are legally obliged to inform customers of this.

More importantly, you should strive to pay back your balance transfer before the interest-free "grace period" is up. Failing to do so will incur interest charges on the outstanding amount, matching the prevailing interest rate of your credit card.

Balance transfers are usually tied to your credit card limits, with most banks allowing you to borrow up to 90 per cent of your limit. Once again, it is a good idea to use a fresh credit card for your balance transfer. Compare the balance transfer offers and apply via SingSaver for best rates and exclusive welcome gifts.

3. PERSONAL LOAN: FOR SMALLER MONTLY REPAYMENTS AND LONGER TENURES

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A third option for making a large purchase is to apply for a personal loan.

Unlike a balance transfer, personal loans offer longer loan periods, which mean you can make smaller repayments spread over more time. This will be useful if you need to make an expensive purchase, but do not have the cashflow to keep up with a short repayment period.

However, personal loans have lower interest rates than credit cards. This makes them a good alternative for big-ticket purchases.

4. HOOLAH: FOR THE GIG ECONOMY WORKER

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A relatively new player on the scene, hoolah is looking to solve common cashflow problems for the young professional or gig-economy worker who may have difficulties obtaining traditional credit card or loan facilities.

The Singapore-based payments startup splits your online purchases into four equal, zero-interest instalments over two months.

Here's how it works: Say you're eyeing a big-ticket item like a new sofa priced at S$800. You can't afford to pay that amount straight up but know that money's coming in. hoolah's payment solution splits that $800 into four equal zero-interest payments of $200 over two months so you can be the proud owner of a new sofa on the spot. Your debit or credit card is then charged automatically on the four due dates.

Do note, however, that hoolah is only available for a limited list of merchants, but that list is expanding. It currently includes furniture retailers Castlery and Hipvan, bespoke lifestyle brand MyDreamVibe, and electronics brands Sennheiser and MOBOT.

The best part: no sign-up fees or processing fees. The participating merchant gets charged a small fee for the service, but for the end consumer, it is totally free.

5. CASH ADVANCE: USE AS A LAST RESORT

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Cash advances are another way to pay for a big-ticket item, but we strongly advise that this option must be used with caution.

If your credit card has a cash advance facility, you can use it to withdraw cash from an ATM. (That's what the PIN that comes with your shiny new credit card is for.)

How much you can withdraw depends on your card's credit limit, and you can withdraw up to 90 per cent of the limit available to you.

However, banks charge an upfront fee for granting the cash advance - commonly S$15 or 6 per cent of the amount withdrawn, whichever is higher. You also will not earn rebates, points or miles on your withdrawal.

On top of that, interest charges - higher than your card's prevailing rate - will be charged on the amount you withdraw. It is not uncommon to see credit cards with prevailing interest rates of 25 per cent per annum, charging 28 per cent to 30 per cent per annum on a cash advance.

There is a way to avoid the high-interest rates of a cash advance; you have to pay back the full amount by the statement due date. This means you could have as little as 20 days to do so.

Clearly, trying to avoid the high-interest rates on a cash advance is a difficult manoeuvre. It is far more likely you will fall short and need to pay expensive interest charges, which could get you into debt.

Even if you do manage to find the funds to pay back the cash advance within the statement period, you will still need to pay the upfront fee. You'd be better off waiting until you have the money, then making the purchase directly.

This article was first published in SingSaver.com.sg. 

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