Consumers must be told the true cost of borrowing in order to make an informed choice. Consumers are willing to pay more for goods bought on credit. However would any consumer buy on credit if the interest charged was 60% per annum?

Not likely , if he was aware that he would be paying interest of 60% per annum. Yes, if he is blissfully unaware of the interest charged and only knows that he needs to pay a small sum weekly or monthly to own it.

According to a professor at a local university, consumers pay at least 30% more when purchasing a piece of furniture or an electrical appliance through credit. For items like computers, cameras and camcorders, the Annual Percentage Rate (APR) could be as high as 60% per annum. The APR measures the effective or true rate of interest.

Take the example of a digital video camera. The cash price is RM1, 199 but if bought on credit, the consumer can choose to pay for it on a weekly or a monthly basis. If he chooses to pay monthly, he pays RM82.98 per month or RM1, 991.60 for 24 months

Though the interest he is paying is not revealed to him, he is effectively paying interest at a rate of 60.36% per annum.

Even in cases where the interest rate is quoted, the consumer still has to be careful. This is because the quoted interest rate can be misleading. This is especially true with hire-purchase loans, where the real interest paid by the consumer is much higher than the figure quoted by the bank or finance company.

For example, when the financial institution quotes 5% per annum as the interest for a hire-purchase loan of a car, the APR (real interest charged) is closer to 9% per annum. Likewise, the motorcyclist who has taken a hire-purchase loan at 10% per annum is actually paying interest of 18 % per annum.

Consumers end up paying more than the quoted interest rate because for hire-purchase loans, interest is charged based on the total sum borrowed and not on the diminishing loan balance. This is in spite of the fact that the amount owed is reduced after each installment is paid.

Consumers should not be kept in the dark about the real interest they are paying for their loans. They have the right to know about the true cost of credit so they can decide whether the loan is expensive or not.

Therefore where credit transactions are entered into, the ministry of domestic trade and consumer affairs must ensure that the following is carried out:

Firstly, the interest rate should be revealed to the borrower before any contract is signed.

Secondly, the interest rate must be quoted using the APR to reflect the true cost of borrowing.

Lastly, the method of calculating the APR should also be standardised since different formulas used can give rise to different figures.

The writer is president, Consumers Association of Penang .