A furniture loan is a debt structured as a term loan that enables a borrower to purchase furniture and furnishing products for the home or office.
Also known as furniture financing, such arrangements enable a property owner to purchase furniture, fittings and furnishing items to decorate the house when he does not have enough cash on hand to fully pay for them.
Items that can be purchased with such financing arrangements are not limited to typical furniture or beds on credit, and can include:
- Electronics
- Appliances
- Furniture
- Fittings
- etc
In essence, a person purchasing home items with furniture loans would be paying for them with cash flow rather than cash.
For example, a household who cannot afford a $10,000 one-off payment for new furniture and fittings, but can afford to pay $500 a month for 20 months.
Who offers furniture loans?
For people who are just seeking information on furniture loans, most would think about banks being the main lender of such loans.
But for those who have actually taken them, they would most probably learn about them from retailers who offer some sort of financing to purchase their home products.
There are essentially 3 types of lenders that offer such loans.
- Banks
- License money lender
- Retailers
And each of them can have very different ways of structuring them.
Banks
Lenders typically offer a cash loan up to a certain multiple of the borrower’s monthly personal income.
This means that for a borrower that has a $3,000 per month salary, a lender willing to go 4 times the salary would have a lending limit of $12,000 for the particular borrower.
This does not mean that an individual with such an income would be able to obtain that amount just for applying for it.
It just means that he or she would be eligible for a maximum of $12,000.
The actual loan quantum would depend on the sales quotation or invoice from the furniture company indicating the total amount of the purchases.
So even though a person might have a credit limit of $12,000, he would only be able to borrower up to $10,000 if the documents from the retailers shows a purchase price of $10,000.
In addition to this, whether $10,000 can be approved will also depend on debt ratios of the borrower.
Because if the borrower already has a $2,000 monthly debt obligation on the $3,000 income, then he might be too highly geared for the lender’s liking.
In such circumstances, the lender would either reject the application, approve at a lower loan amount, approve the requested loan quantum but charge a higher interest rate, or approve it as it is with all the standard terms.
Otherwise, the introduction of a co-borrower should usually be sufficient to obtain approval… provided they have a satisfactory credit score.
The interest rates charged by banks are usually either be on a monthly rest basis or on a flat rate.
A monthly rest structure means that the interest rate is charged on a monthly basis on the principal balance at the end of each month the loan is outstanding.
A flat rate means that the interest would be a flat percentage annually on the loan amount. The simple interest charges would be calculated when underwriting, added to the loan principal, and divided by the total number of months in the approved tenure, to work out the monthly installment payment the borrower needs to make should the facility be accepted.
It is important for borrowers to realize that calculation for interest charges can often be confusing to the average homeowner.
Thus, determining the effective interest rate (EIR) might be a more useful way to evaluate the affordability and feasibility of a furniture before signing up.
Depending from lender to lender, interest rates can be a standard fixed figure or comprise of a combination of an index (such as prime rate) plus a spread.
Because disbursed funds from furniture loans are supposedly only meant to be used for the purchase of furniture, the interest rate is usually lower than unsecured debt such as credit cards and balance transfers.
These restrictions can often lead homeowners to go for personal loans instead of furniture or renovation loans.
The advantage of personal loan is that the funds from the loan can be used for any purpose. They can often be approved at a higher quantum. And don’t required purchase proof of furniture from retailers or contractors.
However, the drawback as many would expect is the higher interest rates.
Licensed money lender
Licensed money lenders are very active in this market.
They are after all, specialist at lending small loans. Especially for legitimate documented purposes such as buying furniture for the home.
These money lenders can have very flexible terms.
Borrowers might even be able to negotiate unique terms into the loan contract. Something that is next to impossible with banks.
Their credit assessment would also be less stringent compared to banks. And loan quantum is something that is subjective.
The problem is that for the added value of easy approval and quick disbursement of funds into account or in cash, borrowers usually pay a premium interest rate.
This premium can vary from anywhere between 1% to 5% compared to financial institutions.
However, they can sometimes be very competitive against traditional lenders when they are running promotions.
The payment structure of loans granted by licensed money lenders are usually by monthly installment payments.
Retailers
Many major retailers are getting into the game of financing.
This enables them to make their products affordable to customers, and also help generate an additional source of interest income.
Because furniture financing can play a crucial role in increasing sales and pushing products, they are the easiest to get approval for.
This is why the most common uses of these financing assistance programs is for the purchase of big ticket items such as mattresses, refrigerators, air-conditioners, etc.
Customers typically make their desired purchases known to the customer service representatives found in retail stores, submit an application for these flexible loans, and the retailers would let them know whether the loan can be approved within minutes.
This means that they use very streamlined automated credit underwriting systems that can quickly determine whether a customer’s furniture loan application can be approved.
The implication is that the credit requirements are limited to a few key criteria.
Once approved and the loan facility accepted by the client, delivery is arranged and the first payment is made. The customer can then look forward to the delivery of the products arriving at his residence at a scheduled time period.
The eligibility criteria for application can be as basic as:
- Being a citizen, permanent resident, or legitimate foreign worker with official work passes
- Between a specified age group
- Minimum purchase amount
- etc
But it shouldn’t surprise you to learn that the ease off all these easy furniture financing comes with high interest rates.
Delinquency can result in high late payment fees. And defaults on store credit can mean the repossession of the products. This is because the products are essentially collateral for the loans.
Nevertheless, it must be noted that retailers are not financial institutions. They are in the business of selling furniture and appliances.
Even after the facility has been agreed and granted, borrowers can often make changes to their payment arrangements by just calling up the retailer.
Finally, do practice some self-control if you find yourself excited about the easy source of furniture financing. Buying more than you can reasonably afford is a debt trap that no one should need to be reminded of.
