However, a truly interest-free installment plan also exists. For example, when using special cards. But even here it is necessary to follow strict rules for repayment on time – otherwise the company that provided the service has the right to apply sanctions. However, today in our article we will figure out what is what.
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. 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. Typically, 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. Frequently it is the same as a loan, but with nuances. You can find more here.
How Installment Payments Are Actually Arranged
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 taking out a conventional loan: the store sends an application to the bank, the bank approves or rejects it, determines the right 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 “Hidden Credit”?
It seems that this scheme is beneficial both for the store and for the client. The seller receives the full amount for the goods at once and receives an additional benefit: the markup on the goods involved in the installment plan is usually higher than the percentage. 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 negate the benefits.
- 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, there is such a possibility, but the principle is very different. It is a payment with special cards, which you may have seen advertised at banks or other financial institutions. Such cards work like credit cards with the only difference being that you do not have to pay any 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 available 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 advantageous 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. To buy something in installments in a store, which is not a partner of the bank, is not possible. 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 require installments relatively often, you can get a special card or an ordinary bank card with this function.
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In both cases, the main thing – responsibility and lack of arrears. If there are, the bank has the right to assess penalties, and then the purchase will 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 own expenses and not neglect your financial literacy. Do not incur 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. We hope we helped you.