Many of us buy on installment because we’re short on cash. This
could be the most expensive money one ever borrows.
Let’s suppose one of your insurance policies has an annual
premium of $1,000. You are given the option of paying $1,000 at the
inception of the policy or of adding 6 percent to the total premium
and paying in two installments. You would therefore pay $530 now
and $530 six months from now. At first glance, it may appear you’re
paying 6-percent interest. In fact, you are paying in excess of
24-percent interest.
Many of us buy on installment because we’re short on cash. This could be the most expensive money one ever borrows.
Let’s suppose one of your insurance policies has an annual premium of $1,000. You are given the option of paying $1,000 at the inception of the policy or of adding 6 percent to the total premium and paying in two installments. You would therefore pay $530 now and $530 six months from now. At first glance, it may appear you’re paying 6-percent interest. In fact, you are paying in excess of 24-percent interest.
Since your first payment is $530, you’ll actually save only a current outlay of $470. Six months from now, you must pay $530; therefore, your $470 payment costs you $60 in interest for six months. The annual rate of interest is in excess of 24 percent.
Consider this typical offer you might receive in the mail: Send $42 now for a book or just $13 now and $13 for each of the next three quarters. Do the math and you’ll see that the annual interest on the $29 not paid at the point of purchase is 62 percent.
The service fees on installment contracts can total up to a tidy sum of money. A review of your insurance policies, club memberships and payment methods for merchandise may provide you with a new investment vehicle – that is, to pay cash rather than buy on installment. This action could get you a higher rate of return than any savings or investment program you now have.
Installment contracts vary. Some companies have no service charge for installments and some have rather substantial ones. The interest percentage stated in an installment contract may or may not include the interest aspect of service fees. Review all contracts where you have an option to pay up-front versus paying in installments.
Doug Herring is a CPA with the accounting and business consulting firm of Bianchi-Lorincz & Company located in downtown Hollister.
