Saturday, 15 July 2017

How a trip to Courts offered me Personal Finance Lesson and its Company model

Recently, my laptop that had accompanied me since my last year of university has been acting up; a sign that a tech refresh to a new laptop may be needed. So I was off for a window shopping trip to identify a laptop good for writing and reading annual reports.

Flexi Plan (which will put you to ruins)

One of those that caught my eye (because it was literally big) was a Lenovo 15.6" inch laptop. It screen size was big and ideal for staring at annual reports and investing forum. Not sure if it was reasonably priced, but it was going selling for $1,499; but what caught my attention even more was Court's Flexi Plan, an installment plan

Apparently at Courts, you can buy many items on installment; and for this laptop, it was being offered on a 60 month installment plan for $61 monthly. 

While the monthly installment sum seemed small, the maths didn't add up. For the laptop on installment, I will be paying a cool $3,660 after 5 years for it. 

Courts Business Model  

Courts has a pretty unique business model- 1) It sells furniture and IT accessories at its retail price for a small margin and 2) It sells furniture and IT accessories in installments at a high margin. Essentially courts is a financier offering consumers "money" to buy items at a loan shark high rate. In fact, in its recent full year results, Courts proudly presents its revenue mix.


Fortunately for the Singapore segment, a small but still significant portion of consumers are tapping on Courts's Installment Plan to finance their furniture and IT accessories purchases. In my opinion, that is still a crazy amount of people taking themselves on a journey of financial ruin.

Of course, to shareholders of Courts Asia, this is music because Courts is able to earn a fat profit margin as it is lending money to consumer at a high interest rate.

Flexi Ruin Plan

Back to my laptop plan. A simple maths will show that over the installment plan, I will be shelling out $3,660 for the laptop if I do not pay $1,499 for the laptop upfront. That is nearly 244% of the upfront retail price Courts is selling.  For $3,660, I would have been able to afford 2 of the same laptop and still be able to buy a brand new Xiaomi hand phone from the spare change!

Seriously, who are those 18.2% on Courts credit scheme?

Let's reverse the scenario. Assuming you put $1,499 in a bank product and wish to withdraw $61 monthly to fund your retirement for the next 5 years. How much must your $1,499 grow annually to fund this?

The answer is a 45.14% annul return.

If you are to ask me: achieving a 45.14% annual return over the next 5 years is no easy task. In fact even the world's best investors including Warren Buffett wont be able to match that. So why should consumers punish themselves by being on these monthly installment plan which are charging a hefty rate (even more than credit card interest)?

No doubt, it is likely there are many people who will default on Court's Installment Plan but that is because the hefty interest rate is killing them. The above is a simple example of a bad debt and how you can lead yourself on a path of financial ruin.