Given the option to pay the full amount in cash when purchasing an item or to pay by installment, which would you choose?
At first glance, paying by installment seems to make us feel better, because we would feel richer as we don’t have to go through the pain of seeing our bank account balance shrink instantly.
However, is that better in the long run?
Is It Interest Free?
Before we can make a decision on that, we have to first examine whether choosing the hire purchase option or paying by installment is interest free.
For some purchases such as engagement rings, the vendors would allow buyers to pay the purchase price in installments over the period of a year without charging any interest provided the buyer’s credit card is from a reputable bank whom they trust to have done their due diligence on credit worthiness properly.
For most other situations, you will end up paying more than the original purchase price in cash if you were to choose the hire purchase option because of the interest charged.
Can You Afford To Pay In Cash?
Another point we have to consider is of course whether we can afford to pay the full amount in cash in the first place. If doing so would leave a significant dent in your net worth or affect your cash flow for daily expenses, then you probably have no choice but to amortise the amount over a period of time by choosing the hire purchase or pay-by-installment option anyway.
How Large Is The Amount?
If the amount is really big, it would likely have an effect on your monthly cash flow if you were to pay the full price upfront in cash. Hence, if that is the case, it is probably best for you to choose to pay by installments.
On the other hand, if the amount is too small, then you will have to decide whether you would want to go through the trouble of keeping track of the monthly payments or charges to make sure that they do not charge you for longer than they should or just pay the full amount in cash and be done with it on the spot.
How Much Will You Pay In Interest?
The larger the amount of the purchase price, comes with higher interest if you choose to pay the price in installments. This is because and interest is charged based on a percentage of the amount that you still owe them. Naturally, the higher the purchase price, the higher the interest amount you will pay.
Hence, if you have the cash in savings necessary to pay for the full amount of the purchase price without affecting your monthly cash flow or expenses significantly, you might want to just bite the bullet and pay the full amount in cash up front. This way you avoid the unnecessary interest charges, which can amount to quite a significant amount if the purchase price is high.
Are There Investment Opportunities With Chance For Better Returns?
Consider if you have better investment opportunities during that same period which you could use your money for. These investment opportunities might give you a much higher return than what you would pay in interests.
In that case, you might want to consider taking that investment opportunity and choose to pay by installment instead. This is because, at the end, you will make more from your investment than the extra interests you have to pay by taking the higher purchase option.
Is The Amount Worth The Trouble?
At the end of the day, it is all up to you.
If you feel that the amount you could potentially save or make from all the considerations above is just simply not worth the trouble, then you should just go ahead and pay in whatever way you feel like paying.
The purpose of this article is merely to highlight to you the potential savings you could have by choosing to pay the full amount in cash up front and the various considerations that you might want to take into account when deciding on your payment method.
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DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.