Pay another day: The problem with instalment plans

Published May 8th, 2016 - 10:47 GMT
Instalments are similar to running costs in that they accumulate over time. (File photo)
Instalments are similar to running costs in that they accumulate over time. (File photo)

Many people are familiar with instalment plans. These are convenient offers provided by many retailers that help consumers buy expensive items and pay the price over a period of time — 12 or 24 months, for example — at a zero- to low-interest.

These plans are always attractive. For example, think about taking a 70-inch television home just for paying a couple of hundred dirhams upfront. The problem with these plans is that they are so alluring that people may end up buying stuff they don’t need, and without thinking about the consequences. And although a big purchase won’t set you back financially immediately, the money still will have to be paid over time.

So similar to any other financing, it is advisable not to pursue these plans without adequate consideration of the overall cost that has to be paid. In addition, take into consideration the following points.

Best price

If you’re offered your instalment plan for no interest or a very low interest, you must compare the price you’re getting as well. Sometimes, you could get a much lower price if you pay in full upfront. So in a way you’re paying more if you’re taking the instalment plan.

In addition, because not all retailers offer this option, you’re probably limited to a few — and their prices. In your research, you must look around and see how much an item costs in other stores that offer similar plans and those that don’t. You may find that pushing yourself to pay for it at once — if that is an option at all — is a much cheaper option.

Running costs

Instalments are similar to running costs in the fact that they accumulate over time. You can easily be lured into buying more, better or more expensive items because you don’t see your bank account taking the hit at once. But in reality, these items will have to be paid for. If you happen to leave the country, you probably will have to settle these purchases and pay the balances before you go.

Keep these factors in mind before you commit to more than what you really need. In addition, remember most household items like televisions, computers, furniture, etc lose value almost immediately after purchase. These are not comparable to cars or homes where you can estimate or foresee some values for them down the road. And your retailer doesn’t want them back, if you default. So your only option is to actually pay for them.

Shorter periods

If you absolutely have to go with this sort of instalment plan, select the shortest, yet comfortable, period. Although this may mean you will end up paying a higher amount every month, you will be able to track your expenses and get the item paid off sooner. By doing so, you can either move on to another purchase, or take a break and assess your financial situation.

If your retailer is open to negotiation, you even may be able to get a better deal on the price. Also offer to pay some money down, and see if that helps reduce the price. In short, even if the instalment plan seems to be set in stone, there may be a room for negotiation especially if it is offered by the retailer itself rather than a bank or some other lender.

Know the consequences

Similar to taking out any loan, you must be fully aware of the transaction’s terms, potential consequences and problems. For example, are there any penalties, extra charges or hidden fees. Is there any required insurance that you have to buy? Are you signing on a blank check as a security? What amount will be entered on this check if you default?

Although in retail purchases, defaults may seem unlikely, you simply need to know the consequences. Think that in a crisis like losing your job, the last thing you need to worry about is how you will be paying off your couch or your flat-screen television.

By Rania Oteify


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