The price tag is just the start

Sue’s 15, working at the supermarket after school, and getting into mountain biking. She’s out to buy a new bike. Her friend has just bought a brand new one, and Sue wants the same model. It will cost about $2000. She’s already got $1000 saved, and she’s thinking about putting the rest on hire purchase.

She looks in the “for sale” classified ads in the paper one Saturday morning and sees the same bike she wants, 2 years old, for $1000. At first Sue doesn’t flinch. She has her heart set on the brand new bike. Then her Mother explains what the HP is really going to cost her.

At 21% interest over 12 months, the $1000 on hire purchase will actually cost $1,105 ($105 in interest). Instead of $2000, the bike is going to cost her $2,105. So in twelve months time, she’s likely to have a bike worth well less than $2,000 and no money saved.

So Sue decides it makes much more sense to buy the second hand bike for $1,000 and then save the money she would have used to pay the HP. After a year of regular saving at 2.5% interest, Sue has $1,118.

She’s really pleased. Now she’s 17, her mountain biking enthusiasm is fading and she’s started thinking about buying a car.