For many of us, there will be times when you need (yes, or want) to pay for something now and pay it off over time. This usually isn’t the ideal, but if you’re going to do it, there are better and worse ways to go about it.
Certainly a credit card is an option here. But frankly, it’s not a great option if you’re simply using a bog-standard card with an 18% APR. That’s a very high price to pay. So what do you do? If you’re a bit financially savvy and research the best deal for your type of borrowing, then you can easily spread or neutralise the cost.
With the new payment plan launched by NatWest, there are now even more options. The high-street bank has launched a mobile app feature that allows credit card customers to set up fixed monthly payments to pay off purchases between £300 and £3,000 over a period of their choosing.
So the question is, as a way to spread the cost of a purchase, is this payment plan option the best way to go or will something more ‘traditional’, like a 0% purchases deal better suit your needs? Let’s break it down.
NatWest’s payment plan
The new payment plan from NatWest is unique in its offering. After announcing five years ago that it would no longer offer 0% deals as it was concerned customers were taking on unmanageable debt, the bank recently reversed its stance and has been dipping its toe back in the 0% water.
The payment plan markets itself as interest free but with a fixed monthly fee. NatWest says how much you pay each month depends on your credit history, the size of the purchase and the term length. However, as a guideline, the typical APR (as of this writing) for the plan will be 10.9%.
Users of the plan can choose to pay off their purchase over a six, nine, 12, 18 or 24 month period, and are able to compare the long-term costs of each option in the app. NatWest will allow users to have up to four plans at any one time.
To simplify it, say you were to purchase a new fridge for £300 and chose a six-month term to pay off your balance. If you were charged a monthly fee equivalent to 10.9%, your total interest payments over the term would be around £9.50. In comparison, for a typical APR of 18% you would be looking at total interest payments of around £16.50.
NatWest says the plan will form part of a customer’s existing credit limit. Under the terms, users can miss one payment; but if they miss a second, the plan will be cancelled and the outstanding amount will be transferred back to the credit card balance and treated as a new payment.
0% purchases credit cards
While the payment plan does offer a way to spread to the cost of your credit card, you will still have to pay something above simply repaying what you borrowed. If you are looking to make a large purchase and pay it off over time, another (more traditional option) would be to take out a 0% purchases credit card.
A 0% purchases card is one on which purchases are interest free for a specified time; you won’t incur any interest charges during the introductory period for that card. Although 0% purchase deals aren’t as long as they used to be, you can still find cards that offer interest-free periods in the mid to high 20s (months).
With these cards you still need to make your minimum payment each month. If you miss a payment, this will not only impact your credit score, but you could also lose your 0% purchases deal. Also, once the introductory period ends, any remaining balance left will be charged at the card’s standard interest rate.
Which is better?
To me, there doesn’t seem to be much to NatWest’s plan that makes it a better choice over a 0% purchases deal. However, here are some positives:
- You are tied to fixed monthly payments, meaning you have a clear repayment schedule in front of you. There isn’t the temptation for you to let your balance just sit there and for you to make only the minimum monthly payments.
- NatWest’s payment plan is based on individual purchases. So you can make a qualifying purchase and select the option of 24 months to repay. With a 0% purchases credit card, if you are already 10 months into your 20 month interest-free period and make a large purchase, you only have 10 months to pay this off.
The NatWest plan provides an interesting alternative to traditional credit card payments or to other finance plans offered by retailers for big ticket items. But in reality, you would need to be a NatWest credit card holder in order to access the plan, and it does not come for free. If you were to borrow £1,000 over 12 months at 10.9%, you would be looking at total interest payments of around £59. This amount is not insignificant, especially in comparison to potentially no interest charges if you were to put the same amount on a 0% purchases credit card.
