They may entice you into buying things you don't need and late payment charges still apply: experts.
After years of borrowing, UAE consumers have changed their ways for fear of getting into financial trouble. Those who are wary of the high cost of debt are moving away from the convenience of credit cards to the security of debit cards. But with the average consumer's spending habits shifting, credit providers and retailers have adopted new incentives to encourage the use of plastic money.
One of the growing trends in the UAE is the availability of credit offers that promise borrowers absolutely zero interest. This product, known in the industry as a "Zero per cent Easy Payment Plan", enables credit card users to pay for their high-value purchases in easy instalments at no extra cost.
The payment plan can apply to any purchase, so if you intend to buy a couch, a camera or even pay for your daughter's tuition and you don't have a budget for it, you can opt for the payment plan. If the purchase costs Dh3,000 and you sign up for a six-month term, you just need to pay equal monthly instalments of Dh500 for a period of six months.
This means debt-wary consumers now have the option to use their credit cards on big-ticket items, without having to worry about sky-high charges.
"The easy payment plans allow you to manage your finances with ease," says Ashish Panjabi, COO of Jacky's Electronics, who have partnered with several UAE banks to offer customers interest-free credit options.
"In a normal scenario, if you are paying through your credit card and arranging a deferred payment, you will be paying two to three per cent interest per month. However, the easy payment plan takes away any additional financial burden."
The payment plans sound like a really good deal, but financial experts warn card users that they could put themselves in danger of getting into more debt than they can handle. What is not often advertised is that banks will automatically levy normal credit card fees such as interest, late payment and over-limit charges on borrowers who miss their monthly dues.
"When you sign up for the easy payment plan on your credit card, it allows you to spread your payment over [a certain period]. Of course, after that, any non-payment of a particular monthly instalment amount as per your payment cycle would definitely attract interest and late payment charges according to your bank," says Oofrish Contractor, marketing manager for Liali, who also has a tie-up with banks to ease credit card payments for jewellery buyers.
Steve Gregory, managing partner at Holborn Assets has already used easy payment plans in the past. He says they work well as long as payments are made on time. "But if you are late, you'll face a late payment fee, in addition to being charged normal interest rates. If the bank includes the deal as part of your outstanding balance, you may face an over-limit fee, in the event that you did not realise and maintain your balance accordingly," Gregory says.
"On the subject of normal interest rates, what is normal? Interest rates are lower now than for decades, except for certain credit cards. Some interest rates in the UAE are the highest in the GCC, and maybe three or four times as heavy as overseas rates."
Spreading debt payments with zero interest is also likely to encourage high spending, a great recipe for credit card trouble. "Some people cannot wait to purchase an item, and may be drawn by the idea of interest-free credit — after all, it's not going to cost them any extra," says John Bailey, financial planner at Acuma Wealth Management.
With that in mind, consumers need to fully understand what they are getting themselves into before committing to such payment schemes.
"Someone once said to me that if it sounds too good to be true, it most likely is. While this certainly sounds like a great way to make a purchase, it is important to remember that the finance houses operating these schemes are not charities. They are there to make money from you," Bailey says.
Bailey agrees that interest-free payment plans can be a great way to make a purchase if the borrower genuinely wants to spread the costs and let their money earn interest and work harder in other areas.
"But don't let them entice you into buying items which you don't need, and essentially can't afford, as deferring the payment will only increase problems further down the line."
Considering the UAE's prevalent shopping culture, however, Bailey says this format of purchasing is certain to expand in the future. He says one only needs to take a short trip down Shaikh Zayed Road to understand how big an impact the endless list of malls and shops plays on the economy, and how much people are spending despite the recent financial crisis.
A Credit Suisse report in 2010 estimated that personal consumer debt in the UAE had quadrupled in the past decade with greater consumerism and easier access to credit being blamed.
"This is alarming by anyone's standards, and it is important when looking to make a purchase that one is not simply looking to defer the payment or take a ‘buy now, worry about it later approach' as it is very simple, it will need to be paid back," Bailey points out.
Bottom lines of banks at stake
Easy payment plans are likely to attract more customers and encourage spending, but the banks' bottom line may also be at stake, a study shows.
According to a paper issued by the International Conference on Information Communication and Management last year, easy payment schemes "could also affect profitability" in situations when customers, due to financial reasons, are unable to make their payments, or in case a cardholder dies.
The paper notes that easy payment plans are different from bank loans where customers are required to put up a collateral.
"One wonders how merchants intend to get back their money in the case of death or high debt on the part of the customer. This is a very important issue that companies and merchants offering the easy payment scheme should take into cognisance."
The paper points out that easy payment plans might lead consumers into buying more than what they can afford, "thus leading to an accumulation of debt and in extreme cases, bankruptcy on the part of the customer."