The popularity of paying in installments has seen an upswing with disruptors taking the lead away from credit card companies. However, most people still associate installment purchases with their credit cards. Some cardholders even associate installment with their credit cards and they use it exclusively for that type of payment method.
This is one of the reasons why the installment option on purchases has become a normal method for a lot of people. It is even true for most of the big-ticket items where lenders provide you a loan upfront and you pay installments over time. The idea is that lenders and creditors earn from the interest they add on your payments.
Paying in installments is used when you take out a mortgage loan. Homeownership remains to be one of the top goals for Americans. Brookings even shares that owning a home is a cornerstone for the middle class in the country. When you buy a house, it is very rare that you pay for the whole amount. You pay a lender in installments until you pay everything in full.
The same goes for other high-priced items such as buying a car or even paying for a higher education where you borrow money and pay it back in installments. This has already been a way of life for a lot of people that which could put you in constant debt all the time. To understand installment payments better, you need to look at both sides of the story.
Pros
Paying in installments can be a life-changer for your finances for a number of reasons. Here are a few of them to look into.
You manage your money better
One of the many benefits of paying your lender in installments is that you get to manage your finances better. This allows you to purchase the items that you need without digging deep into your savings. The problem with using the money you have been saving for a long time for something else is that you might not be able to put it back.
There is also the chance of losing out on compound interest over time. This allows you to earn off of your savings over a long period of time. It gives you the ability to grow your money as you continuously save. If you take the money out of your savings to make a big purchase, you stand to lose not only the potential earnings but the whole amount as well.
The chance to earn off of the item
There will be times when a purchase can help you improve your finances especially when you can earn from it. If you have an income-positive hobby, this method of repayment can help you get started in earning extra money. It would be too difficult to buy everything you need in one go and end up losing a lot of money in the beginning.
If you are a budding photographer, you already know that the tools of the trade can be quite expensive. Choosing to buy everything you need and paying in installments can help you manage your cash flow better. As you earn money with paid shoots, you can make the installment on your equipment until you pay it off. You can also do the same with other hobbies like baking equipment or even a high-end computer for graphic design needs.
This method is budget-friendly
Paying installment on purchases you make helps you budget better. This is one of the great things in paying for your purchases in installments. Paying for your purchases in installment helps you divide up the amount into doable payments over time. This way, you do not have to sacrifice payments for other debt accounts you have.
As you pay down big purchases on installments, you are able to stick to your other payments as well. This is because if you suddenly find yourself having to make a big payment on your budget, other areas might begin to suffer. You might find the need to cut down on other areas just to meet this payment and you end up paying huge fees and other fines on payments you overlook.
Cons
Just as there are upsides on paying in installments, there are also some downsides to it. It pays to know these possibilities to help you make a better financial decision.
There are fees that come with late payments
As mentioned earlier, there are certain fees and penalties that come with installment payments. This is true especially when you are sending out your payments after the due date. There are also instances when you think that consolidating your debt in a 0% interest card will last you until you pay everything off. You are then caught off-guard when you receive your statement with a huge amount you have to pay.
You need to be on guard when paying in installments because once you get behind your payments, lenders would begin to add fees on your statement. This will make it challenging for you to pay off your balance. You can be paying for so many months and barely making a dent on the amount because most of your payments go to interest and fees.
Depreciation can hurt long term installments
One concept you may not realize when you make a purchase on installment is depreciation. Take a car for example where you take out an auto loan just to afford one. Once you get the vehicle and drive it away from the dealership, it is already losing value. This means that you are paying for a depreciating item at a full price. Forbes explains depreciation as the degree by which your vehicle’s value drops over time.
The longer your payment timeframe will be, the bigger the possibility that you will be paying more for what you bought. You end up losing a considerable amount of money in the end. This makes it all the more important to try and save up for the purchase so you can pay for it in full. If you cannot, do your best to put in as much downpayment as you can so you only pay a small percentage of the total price in installment.
Emergencies can put you in a tight spot
You never know when an emergency might happen that is why you need to have a reserve fund for such situations. This includes not only your emergency fund but your rainy day fund as well. These two work in tandem to help you address unforeseen situations in life. However, if you do not have enough in these funds, you would rely on other options.
Some people would look to their credit cards as a viable way to help them get over their financial problems. However, if you have a lot of installments on the card, you might not be able to use it for emergencies. Remember that even if you are paying a small amount every month, they can come up to a big amount when you put all of them together.
There are a lot of pros and cons when you start to consider paying in installments for the purchases you make. The idea is to make sure that you are able to balance the two and that you make the most out of this payment method. In the end, it should strengthen your finances and not put you in deeper debt.