Is there ever a right time to using installments vs. paying cash for something? Normally I’d say NO….except there are a few situations where it makes sense. The people over at BillShrink.com have made a short list of when it’s just as smart to pay on an installment plan as it is to pay cash…and I agree.
1. When the interest rate is zero. Or, when the interest rate is very low. If you’re confident you can pay each month, take the installment plan option. This is a great way to demonstrate that you can pay your bills and enhance your credit score. If the interest rate is below 5%, consider an installment plan versus putting a big purchase on a credit card that is likely to have a much higher interest rate. This way, you can still take the opportunity to boost your credit rating and keep your money in the bank for any unexpected expenses.
2. When there is no interest for the first months and you can pay off the balance without the interest accruing. Why pay a few grand right away when you can pay a fraction of that each month? If you’re confident you’ll have a steady income for the next year or so, it makes sense to keep some in your bank (find an interest-yielding savings account) to accrue interest instead of getting rid of it in a lump sum.
3. When you don’t have the cash to pay upfront, but expect to have enough in the future from your paycheck, investments, or other sources to pay the installments. So you don’t have enough savings in the bank to pay for a new couch, but you know that your pay check is sticking around. Just think of it like your monthly utility bill and factor it into your budget. It’s important to have a little cash in your account in case an unplanned expense pops up, like a medical emergency or layoffs at your company.
I still think that paying for items IN FULL is a much better scenario, but at least with those three options you won’t be saddled with those awful interest rates and payments that seem to last forever.