A Consumer Deciding Whether to Buy on Credit
A young couple in Gaborone, both employed, want a refrigerator. The shop offers two options. Option A: pay cash of P4,200. Option B: a hire-purchase agreement with a deposit of P600 and 12 monthly instalments of P380. The couple has P1,500 in savings and takes home P6,800 a month between them. Their rent is P2,000, transport P900, food P1,800 and school fees P700 a month. They have no emergency fund beyond the P1,500. The refrigerator they own now is 14 years old and has started to fail, spoiling food about twice a month.
1. Calculate the true cost of each option and assess whether the couple can afford the hire-purchase instalments.
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Cost of Option A (cash): P4,200.
Cost of Option B (hire purchase):
- Deposit: P600
- Instalments: 12 × P380 = P4,560
- Total: P600 + P4,560 = P5,160
- Extra paid over cash price: P5,160 − P4,200 = P960, or about 23% of the cash price.
Affordability check:
- Monthly income: P6,800
- Fixed expenses: 2,000 + 900 + 1,800 + 700 = P5,400
- Surplus before the instalment: P6,800 − P5,400 = P1,400
- After a P380 instalment: P1,400 − P380 = P1,020 left.
So the instalment is affordable on paper - it uses about 27% of the surplus. But the P1,020 must also cover electricity, toiletries, clothing, emergencies and any price rises. The couple has only P1,500 in savings and no emergency fund, so any unexpected cost (illness, funeral, retrenchment) would put the instalments at risk.
2. Recommend a course of action, giving reasons that consider both the cost and the risk.
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Recommendation: a middle path - save briefly, then buy, or negotiate a shorter agreement.
- Use the failing fridge as the trigger, not the excuse. It spoils food twice a month. If each spoilage costs about P150, that is roughly P300 a month wasted - almost as much as the instalment. Delay has a real cost.
- Avoid the full 12-month hire purchase if possible. The P960 extra is money paid for nothing but time. The couple's surplus is P1,400, so they could save P1,000 a month and buy cash in about three to four months, keeping the P1,500 savings intact as an emergency fund.
- If the old fridge fails completely before then, take the hire purchase but shorten it: ask for a larger deposit (say P1,200 from savings plus one month's saving) to reduce the instalments or the term, cutting the interest paid.
- Protect the emergency fund. Never spend the last P1,500 on a deposit, because a hire-purchase debt with no cushion is the riskiest position.
Reasoning: the decision is not 'credit is bad' but 'which risk is larger - P960 of interest, or P300 a month of spoiled food plus a household with no working fridge?' The answer changes with how soon the old fridge dies, which is why a short saving period is the best balance.
3. Explain two consumer rights or protections the couple should check before signing the hire-purchase agreement.
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A written agreement showing the cash price, deposit, instalments and total credit price. The couple should confirm in writing that the total is P5,160 and that no hidden charges (insurance, delivery, administration) are added later. Knowing the true total is what allows the comparison in the first task; without it, the P960 premium is invisible.
Terms on early settlement and repossession. They should ask what happens if they pay off early - is the P960 reduced? - and what the seller may do if an instalment is missed. Under hire purchase the goods usually remain the seller's until the last instalment, so missing payments can mean losing both the fridge and the money already paid. Understanding this makes clear why an emergency fund matters.
Checking these before signing turns a verbal promise into an enforceable position and protects the couple if their income changes.