As consumers we depend on credit and we all have taken a loan at some stage in our lives.
Yet we have limited understanding when it comes to deciding which credit provider is giving us the best deal.
There are many consumers who fail to understand the true cost of borrowing.
Consumers tend to take loans but are not aware of the costs associated to their loans.
Consumer literacy is crucial to empower consumers because empowered consumers not only identify the best prices and quality, but also reward the most efficient hire-purchase company by asserting their rights.
The consumer council's hire- purchase (HP) report has revealed that 41 per cent of the population claims they are loyal HP consumers.
Of those relying on HP, 79 per cent understand that the HP company provides the loan that they take to purchase the items. A fifth, on the other hand, think that the HP is a system of delayed payments for the items bought, without any additional charge on the cash price of the item.
Of those who purchased goods on HP, 36 per cent stated that for their last purchase, the supplier did not advise them of the interest and other charges associated with the purchase.
The Consumer Credit Act requires HP companies to provide pre-contractual disclosure showing the various charges and fees applied on the item to be purchased to enable consumers to understand their financial obligations and as a result make an informed decision prior to purchasing goods on credit.
However, not all consumers are financially literate when it comes to taking loan. As such, an explanation in vernacular languages to the consumers would make them understand their key financial commitments they will be making under the credit contract.
Currently, there is no requirement that each HP customer should receive an explanation on the financial terms and conditions of their HP agreement in a language of their choice.
About 53 per cent of the consumers asked their HP companies to advise them of the total interest payments on the purchase.
Unfortunately, HP contracts/agreements do not have any statement or explanation on the calculation of interest rates.
Financial literacy empowers consumers to assess the options available to them.
One option that HP consumers have is paying off their loans earlier than the due date.
To exercise this option they would need to know the financial advantages they would get out of early payments. Actual responses from consumers indicate that 71 per cent of the consumers are not shown any calculations on rebates for early payments.
Of the 29 per cent consumers who were shown some calculations or formula on the calculation of the rebates, a quarter could not understand the calculations.
HP companies also levy a 'documentation fee' on every HP transaction.
The legislation is silent on the types and quantum of fees which credit providers can levy.
Historically, in credit provisions, interest payments were justified as the only basis for recovery of expenses incurred by the credit provider.
It must be understood that credit is an investment for the credit provider, and in making this investment, the credit provider incurs some expenses, as well as foregoes the use of the funds which it has provided.
These costs which are the direct cost of the credit and the cost of the opportunity forgone are covered by an interest charge.
Over the years, however, credit providers have begun to recover the direct costs through levies other than interest charges, thereby leaving the interest component as a net margin.
Regulators and society generally have tolerated this in the name of free enterprise where buyers and sellers can agree on any price they wish to.
About 44 per cent of the consumers in Fiji do not know that there is a documentation fee that is added to their loan amounts while 56 per cent of consumers do understand that they had to pay for documentation fees on their products bought on hire-purchase.
Of the 56 per cent of consumers who are aware of this fee, only 58 per cent learnt that they are required to pay documentation fees before they bought the items on HP while 42 per cent of them learnt of this fee either after they had agreed to buy the item or after repayments had started.
The Consumer Council under an AusAID-funded project has embarked on the TV show Dollars & Sense to build credit competency in our consumers so that they feel capable, knowledgeable, safe, and secure in their dealings with credit providers.
You are urged to watch Dollars & Sense on Fiji One every Tuesdays at 8pm to understand your rights and responsibilities under the Consumer Credit Act.