What is an installment plan, and what are its features?
Stores offer interest-free installments without overpayments, which look more profitable than buying the thing you need on credit. In fact, there are pitfalls: yes, the purchase may be more profitable, but buyers need to keep a close eye on the payment schedule. And the interest is in fact there, just hidden from the buyer.
However, a truly interest-free installment plan also exists. For example, when using special cards. But here, too, you should follow strict rules for repayment on time – otherwise the company that provided the service has the right to impose sanctions.
What is an installment plan
Installment payment is a mechanism of gradual payment. A person buys something and pays for it in installments over a certain period, which is usually several months. A part of the amount is paid immediately, and the balance is paid by the buyer in equal installments, without additional charges. The lack of interest is the main feature of installment payments, so it’s often used in business and in transactions between individuals. Stores also offer customers an installment plan. Usually this applies to expensive goods that are difficult to pay with a single payment. And at first glance, these terms seem advantageous: there is no interest, and pay the entire amount at once does not have to. But the installment plan has its own characteristics. Usually, it is the same credit, but with nuances.
How is the installment plan actually organized?
When buying goods in a store, a person may find that he enters into a contract with a banking or microfinance organization. It provides the store with money to pay for his purchases. The process is about the same as for taking out an ordinary loan: the store sends an application to the bank, it approves or rejects it, determines the appropriate terms and concludes an agreement with the borrower.
- The interest is actually there. But when paying for the goods the store gives the buyer a discount on their size, so the cost to him is the same as if they were not there.
- Despite this, in case of late payment the bank has the right to impose penalties and fines, as well as to increase the interest rate, if the client does not comply with the terms of the contract.
- This kind of installment plan is called a hidden loan. It really can be profitable – but only if the borrower has taken into account all the nuances.
What are the disadvantages of the “hidden credit”?
It seems that this scheme is beneficial both for the store and for the client. The seller immediately receives the full amount for the goods and receives an additional benefit: the markup on goods involved in the installment payment is usually higher than the interest. And the buyer pays the same amount as without the installment plan, but can “stretch” it out for several months. In addition, he can repay the obligation early and save on interest. But there are a few details that can nullify the benefit.
- When you take out a loan, you may be required to take out insurance, which increases the likelihood of approval. Whether this is true is hard to say, but insurance premiums can seriously increase the amount you have to pay.
- Additional services may be connected by default, and some of them are paid – for example, SMS-notifications. Be sure to clarify this point.
- Installment payments under this principle are limited to a limited number of items. You cannot buy anything.
Is there an installment plan without interest?
Yes, such an opportunity also exists, but the principle is quite different. It is a payment with the help of special cards, advertising which you may have seen at the banks or other financial institutions. Such cards work like credit cards with the only difference being that you do not need to pay interest if you use them correctly. The conditions may be different and depend on the offer.
- Financial institutions have the following advantages: they agree to work in partnership with certain retail chains. If the cardholder buys something from a partner bank, the store pays the bank a fee. This serves as payment instead of interest.
- A person can spend within a certain credit limit and then pay it back in equal installments, which are usually determined automatically. This installment feature is not only in special cards, but also in some ordinary bank cards – credit and debit cards.
What are the disadvantages of using interest-free installments
Such offers are more favorable than a hidden loan. First, you are not tied to the bank’s approval of each purchase, and second, you have the right to buy any goods or services. But here, too, there are nuances: financial institutions cooperate with specific networks, and installment payments are provided only in them. Buy something in installments in a store that is not a partner of the bank, you will not be able to. But in the partners you can buy anything. If you do not pay or are late, the bank has the right to impose penalties and change the conditions of service. That is why you should use such cards with the same responsibility as a normal credit card
Should you use an installment plan?
It depends on what your goals and needs are, as well as how good your money management skills are. If you’re confident and know you won’t fall behind on your payments, installments can be a convenient financial tool for you.
- For single purchases you can also use hidden loans. The main thing is to carefully read the terms and conditions before signing the contract and to clarify all the unclear points, so as not to encounter hidden payments.
- If you need installments relatively often, you can get a special card or an ordinary bank card with this function.
In both cases, the main thing is responsibility and the absence of overdue debts. If you have them, the bank has the right to accrue penalties, and then the purchase will suddenly cease to be profitable. In addition, the delinquency spoils the credit history, and long debts can lead to more unpleasant consequences.
Installment payments of both types can be a convenient tool, but only if you take it responsibly. We recommend that you pay more attention to your expenses and not neglect your financial literacy. Do not allow debts, and if you already have them, try to pay them off as soon as possible. This way you will be able to use banking products to your advantage – even if they are a hidden loan.