Why You Should Never Prepay For Big-Ticket Items (Even If You Get Big Discounts)

This article was written in collaboration with the Consumers Association of Singapore (CASE). All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.

Holiday season is upon us. Many of us will find ourselves shopping for gifts and looking for good deals on big-ticket items. It is also a time of the year when you might be thinking about pampering yourself and making New Year’s resolutions like losing weight and getting in shape.

This year’s end is also significant because we are on the cusp of an impending GST rate hike from 1 January 2023. From the current 7% GST rate, it will increase to 8% in 2023 (and to 9% in 2024).

As a way to save on higher GST costs, some businesses have dangled big discounts to customers who prepay for large-ticket items such as renovation bills or sign up for long-term contracts such as fitness club memberships by the end of the year.

Restaurants are also reporting that more customers are prepaying for their Chinese New Year reunion dinners, wedding banquets, and even corporate events to avoid paying the higher GST next year.

While it’s natural to want to save on your big-ticket expenses by prepaying, doing so comes with its own risks.

Read Also: From Wedding Banquets To Renovation Works: Why You Would Be Still Paying 8% GST Even If You Book Now?

Risks Of Prepayments

A prepayment is when you pay for goods and services ahead of time (either as a lump sum payment or as a deposit) to a business before the service is done or the goods are delivered.

Some retailers might entice you with big discounts to pay the full amount upfront for services that they will only deliver in the future. Some examples are fitness club memberships, beauty and spa packages, travel packages, and home renovations.

When making a prepayment, you need to consider the potential risks of not receiving the goods or services that you paid for or, in a worst-case scenario, the business closing down and you being unable to recover your money.

But the concern over prepayment losses is not confined to the renovation contractor industry. Since 2019, consumers have reported more than $3 million in prepayment losses, with several high-profile business closures, such as travel agency STA Travel and indoor playground SuperPark. According to the Consumers Association of Singapore (CASE), in 2021 alone, consumers lost more than $520,000 in prepayment losses, compared to over $275,000 in 2020.

Fortunately, there are steps that you can take to protect your hard-earned money and mitigate your losses from prepayment.

How You Can Protect Yourself As A Consumer If You Need To Make A Prepayment?

Here are six tips that you can adopt to safeguard your money when making prepayments on your purchases.

#1 Limit Prepayments Based On Needs Rather Than Wants

Before making any large purchases, consider whether you truly need or want them. Don’t be tempted to make these purchases because of attractive discounts or possible savings if you don’t really need them.

By limiting your purchases to those based on your needs, you will not only have more savings for a rainy day but also avoid taking on unnecessary additional risks with large prepayments.

Read Also: Struggling To Cope With Inflation: 5 Things To Be Avoiding, And What We Should Do Instead

#2 Negotiate For Lower Deposit And Progressive Payments

In some industries, like home renovation, contractors may ask for payment upfront to buy materials, tools, or pay sub-vendors before work can begin.

One way you can protect yourself is by negotiating for progressive payments that are based on milestones. This would allow you to pay a certain percentage progressively as the different works, like flooring, carpentry, and painting, are completed.

Additionally, you can also negotiate for a lower deposit and retain around 5–10% of the total amount payable for around 14 days after satisfactory completion of all works, including any defects.

#3 Avoid Prepaying For Large Sums Or Lengthy Contract Periods

It is common for gyms to offer membership packages that entice longer-term (i.e., 2 to 3-year) sign-ups with big discounts. Such deals would not only require you to pay more money upfront but would also take you a longer period to consume the services.

This increases the chance of losing your prepayment due to the company going insolvent before the end of your contract. Instead, you could choose to pay for a shorter-term membership or even a “per use” fee whenever you need to consume the service.

Even though you would likely pay more doing this, it eliminates the risk of losing your money from large prepayments.

#4 Deal With Companies That Have CaseTrust Mark

Always check with the business on the prepayment protection they offer before coughing up your cash.

Alternatively, you could patronise businesses that carry the CaseTrust Mark. You can search for CaseTrust-accredited companies on the CASE website. The CaseTrust is an award given to companies that meet the criteria set under the accreditation scheme, which assesses for good business practices such as a transparent business policy, feedback management, and dispute resolution.

Source: CASE (CaseTrust Mark)

Currently, there are over 800 CaseTrust accredited companies. For example, companies under the CaseTrust Spa and Wellness Accreditation Scheme provide consumers with peace of mind by adhering to the following consumer-friendly policies:

(a) Protection For Prepayment: consumers can be assured that the value of their unutilised balance will be protected with documentation and real-time verification of the coverage provided. The maximum amount of prepayment insurable is up to $10,000 per year;

(b) 5-Day Cooling Off Period: consumers enjoy a 5-working day cooling-off period to seek a full refund of unutilised payments to deter pressure selling;

(c) Stress-Free Treatment: consumers can be assured of a relaxing and stress-free treatment because of a “No Selling” policy when they enter the treatment room;

(d) Clear Fee Policies: consumers will receive clearly articulated and documented policies on charges and refunds, including all the terms and conditions of the purchase;

(e) Well-Defined Business Practices And Systems: consumers would have access to proper recourse with the company as it must put in place a redress system with proper and clearly defined dispute resolution mechanisms; and

(e) Well-Trained Personnel: consumers could be assured of no pressure sales tactics as the business must ensure it has well trained sales staff who do not practice unethical sales tactics.

By shopping at businesses that carry the CaseTrust Mark, you can be assured of their commitment to fair trading and good business practices.

#5 Consider Payment Methods That Offer Prepayment Protection

With the growing adoption of digital payment methods, consumers have more options, including credit cards. Typically, if you make a prepayment with your credit card and then don’t get the goods or services you paid for, you could use the chargeback mechanism to reverse the transaction and get the rest of your prepayment back from the card issuer within 120 days of the date of the transaction. Thus, this is only applicable to shorter-term prepayments.

You could also consider alternative online payment methods like PayPal that offer a certain recourse or protection in the event of non-performance of a service or delivery.

#6 Keep Proper Documentation

Remember to keep a proper record of all documents, such as receipts and contract forms, from businesses that you make prepayments to until you have fully utilised the product, service, or prepaid value.

This will allow you to prove that you have made those prepayments and ensure you are able to seek recourse in the event of any subsequent disputes after the purchase. You will also be able to show proof and make any claim as an unsecured creditor in the event of the liquidation of a company.

Better To Be Safe Than Sorry

Due to the impending GST rate increase in 2023, it’s understandable that you might be thinking about prepaying for big-ticket items this year-end. Yet, it’s important to remember that the risks of losing your money in the event of a business’s insolvency may outweigh the savings on the prepayment.

At the end of the day, the maxim “caveat emptor” (let the buyer beware) still applies. There is no guarantee that even well-known brands are a safe bet, as evidenced by the bankruptcy-related closure of Robinsons, a 162-year-old department store, in 2020.

You should always consider options that do not require you to make large prepayments or bind you to a long-term contract. If you have to make prepayments, then consider the tips provided in this article for keeping your money safe.

Read Also: 9 Big-Ticket Items To Buy In 2022 Before The GST Increase Next Year