Should I Pay Cash Upfront or Pay in Instalments?
Published: October 9, 2017 | Updated: June 10, 2021 | Posted by: Luis Tan | Personal Finance
We have a lot of expenses in life but of course, we have a limited amount of money. We have a never-ending electric and water bill, loan repayments etc. But at the same time, we often have two options for paying for our purchases – instalments or lump sum cash purchase. Question is, how should we decide as to which is the best payment option? There are many factors that play a role in determining the best payment option. This article will give you an idea on which payment option is the best for you and get the most out of your hard-earned money.
Table of Contents
1. Emergency Fund
Do you have an emergency fund? An emergency fund of about 3-6 months of expenses should be readily available to you. This helps in cases of emergencies like illness, accidents or even loss of a job. By having an emergency fund, you will have a sense of security to yourself and your loved ones. We cannot predict what’s going to happen in future.
If you are buying a big-ticket item like a laptop or foreign travel, you should not dip into your emergency fund. It might make better sense to finance the purchase. It is not a great idea to get a loan and blow up existing cash on other frivolous expenses. Instead, utilize the money you have saved via investing.
2. Reasonable or no extra cost in paying in instalments
Always check out the terms and conditions of the instalment payments. In some cases, the instalments have zero interest or reasonable interest rates. It is good to take advantage of deferred payments in these cases as you can spend without fear of financial setbacks.
3. Credit card purchases
Credit cards offer instalment payment plans that offer flexibility in payment which is an advantage. Paying a lump sum amount using a credit card at the right time in the credit cycle to buy a gadget etc. is also a smart option as the payment gets deferred to the next billing cycle. You have that much time to arrange for funds or make your money more productive. However, if you are a first-time credit card user, here are some critical things to keep in mind before making the purchase.
4. Discount for payment of cash upfront
Are you getting a good discount to pay upfront? If yes, then you should pay a lump sum amount especially if it is a needful expense like a child’s music coaching or a laptop for college. A discount of anything around 5% or more is a good reason to pay in full.
Advantages of installments
- If you are buying a house, it might be better to go for installments as the sum is obviously huge and you might not be able to afford a lump-sum payment or even if you can afford it, it can make a huge dent on your cash flow.
- Many appliances stores offer to sell appliances and electronic goods at installments with 0% interest. You should go for these offers as purchases such as home entertainment systems, air conditioning units are consumerist in nature. Rather than paying upfront and messing up the budget, it is better to go the installment way.
- Paying in installments is better when you are on a tight budget. Spreading the expenditure over a period of time does not put constraints on the cash flow.
- If you have a productive use for the large chunk of money, it is better to pay in instalments. You might use the money for investments or buy something you or your family really needs.
Advantages of lump-sum payment
- It is better to pay a lump sum amount in some cases. If the interest rate on the installments is very high and you will end up spending a significant chunk of money in servicing the payments, it might be better to pay upfront.
- In some cases, it might be better to pay a lump sum amount for depreciating assets. For example, it is better to buy furniture by paying a lump sum amount, Its value will depreciate and you do not want to pay interest on a loan to buy it and make it more expensive. Interior design trends change, furniture gets old and you will not get a great resale value for it. Another example is a car. In some cases, the car is not necessary but want or a status symbol. You do not have enough money to buy the car you really want. But the cost of financing a car is expensive. Moreover, the rate of depreciation of a car is high. It might be better to
- Buy a car that is less expensive paying the lump sum amount
- Or wait till you can purchase the car of your dreams by paying upfront.
There are certain scenarios where it makes sense to make a purchase in installments and some in which paying a lump sum amount is better. You will have to make a rational decision based on what you want to buy, why do you want to buy and your financial status and maybe your family’s financial status. Do remember to put your money to productive use if you are using the installments approach and bear in mind your current expenses, immediate future expenses if you use the full payment approach.