Tuesday, October 23

Pros and Cons of Paying Over Time

How often do you choose to pay for something over time? You have chosen to pay over time when you've used a loan or credit card to pay for something. While choosing to pay over time can be convenient, it can also be costly if you don't consider interest, fees, and other charges. Keep more of your money by minimizing the amount of interest you pay by paying off the debt as soon as possible. There are situations in which paying over time is the right choice and situations when it is not.

Pros

With careful planning, paying over time can be useful financial tool. It can be used for large purchases such as a home or a vehicle provided the loan fits in your budget. Before using a credit card to buy a big ticket item or to take a trip have a plan to pay it off quickly.

Cons

There are many ways in which paying over time can be costly.

0% financing offers may seem like good deals but always read the entire contract especially the fine print. With many of these deals, if a payment is late or missed the terms of the loan change which usually results in a higher payment and interest rate.

Some charge cards that require you to pay off the balance each month also offer a pay over time option. Typically, you can choose which charges to pay over time. In some instances certain charges are automatically chosen. If you use this option, you should pay more than the minimum specified by the card issuer.

Credit card features that allow you to designate charges to pay over a longer period of time or allocate your payment to specific charges are marketed as helpful to you but may actually cost you more. By spreading out your payments, you end up paying more in interest. While few cards offer these features, one card issuer is offering a flexible installment program overseas which allows the card holder to turn a transaction ($500 minimum) or their account balance into a separate loan with a specified interest rate of 5% to 36% and a term of 6 to 48 months.

To make purchases easier, some businesses have partnered with online financing companies. Choose the online financing company at checkout and your purchase is paid for with a loan from that company. Even though you may have a choice of the number of months to repay the loan, you may not be able to pay it off early without penalty. Another drawback is not being approved for the full amount after the sale is completed and having to pay the finance company the balance immediately.

Compare all payment options before choosing to pay over time

Before you whip out a credit card to pay for a big ticket item such as the latest smart phone or sign a contract promising "no interest or payments until 2025" for purchases such as new family room furniture always compare all your options for paying for the items. Determine which option works best for you. And remember, never pay over time for everyday expenses such as groceries, gasoline, office and school supplies, or utilities.


Originally published August 2018.