The real cost of instalment payment plans

woman checking receipts

05 Nov 2018 | 3 min. read

Instalment plans aren't all the same. Find out the difference between in-house instalment payment plans and instalment payment plans offered by credit card companies, and the hidden costs of each.

Key takeaways

  • In-house instalment payment plans offered by a store may charge high interest rates.
  • Small monthly payments can add up, and you may end up paying more than the original purchase price.
  • Instalment payment plans offered by credit card companies are interest-free as long as you pay in full and on time.

Instalment plans make items seem more affordable by breaking up a large purchase into smaller monthly payments on your credit card. However, depending on the type of plan, their total cost can be much higher.

Types of instalment plans

There are generally two types of instalment plans:

  • In-house instalment payment plan - The store offers to extend credit to the customer. In these plans, the store can usually repossess the item should the customer fail to pay their instalments.
  • Instalment payment plan offered by a credit card company - Credit is offered as a deal between a credit card issuer and a merchant as an incentive for customers to use that credit card.

Here's how they compare:

In-house instalment payment plan Instalment payment plan offered by a credit card company

Offered by merchants. Can be offered even for small amount purchases.

Arrangement between merchants and card issuer. For large amount purchases only.

Repayment up to 72 months.

Repayment usually up to 36 months.

Charges flat-rate interest of 11% to 27% p.a.

Interest-free, provided instalments are paid in full by the due date.

Let's look at these two types of plans in-depth.

In-house instalment payment plans

For in-house plans, merchants typically charge a flat interest rate of 11% to 27% for a repayment period of up to 72 months. Plans can be offered even for small purchases.

Take note: the cost is much higher than it seems

Even though you are only paying a small instalment each month, the final cost of the item is much higher after taking the interest into account.

Example

Suppose you walk into a store and see a 65-inch Ultra HD 4K TV marked down from $6,500 to $5,200. That's 20% off the original price. It's still a big amount, so the salesperson offers you an instalment plan of just $44.90 per week, over 48 months.

Seems like a good deal? Let's do the maths:

  • What you pay per month: $44.90 x 4 = $179.60
  • Total paid after 48 months: $8,620.80
  • Total interest paid (on sale price of $5,200): $3,420.80

After 48 months, that TV will end up costing you $8,620.80. That is almost 66% more than the sale price of $5,200, and almost 33% more than the original price of $6,500.

In some cases, the interest you pay could end up being more than the purchase price itself!

Zero-interest instalment payment plans

Interest-free instalment plans offered by credit card companies allow you to pay the same price as someone who pays the whole sum upfront in cash – but only if you pay the instalment in full and on time.

Take note: your obligation is to the bank

With an instalment plan, your payment obligation is to the credit card issuer, not the merchant. Once you charge something to your credit card, you have to settle the charge fully.

This means:

  • You will need to keep paying the monthly instalments even if the merchant winds up
  • Although the instalment plan itself is interest-free, if you miss a payment, you will incur credit card interest charges
  • You may not be able to cancel the card until you make all the payments
  • Refunds or exchanges may not be allowed once the bank approves the instalment plan
  • You may have to pay a penalty fee if you decide to opt out of the monthly instalment plan and repay it sooner
  • The unpaid portion of the instalment is counted as a debt in your name

The bottom line

That deceptively low monthly payment may end up costing you much more in the long run. So consider saving up for a purchase, instead of taking on an instalment plan.

If you are already on an instalment plan, think carefully before committing to another one. The overlapping instalment payments can quickly add up and hit your monthly cash flow.

Last updated on 05 Nov 2018