If you have the option of paying for something in full, or paying for it in installments, which method do you choose? A number of factors play into making a wise decision of lump sum or installments.
It's good advice to consider expensive purchases carefully before buying. And the more expensive the purchase, the more consideration you should give. A good rule of thumb is to wait one day for each $100 that the item costs.
Often we're presented with payment options for a large purchase. These may include a one-time payment option, or periodic options like annual, quarterly, or monthly payments.
We recently had two big expenses to consider. Each one was between one and two thousand dollars. And each one had its own set of multiple payment options.
Pay in a lump sum or installments?
The first was an operation for our six-year-old dog who tore out a ligament and couldn't walk.
The options available for payment of the operation were to pay the entire amount up front or to use a health care credit card offered by the vet to pay over time with no interest.
This is actually three options because if we use a credit card to pay up front, we can choose either to pay the next bill in full or to stretch it out over time.
We didn't really consider carrying a balance on our credit card to be a viable option because that's not a road we want to go down if we don't have to.
And though the health care credit card did get our attention, reviewing the terms and conditions were enough to show us that it was risky to do this. (There were too many ways to screw up, and this was possibly by design.)
So for this one we decided to pay up front. When choosing lump sum or installments, we chose lump sum.
Pay monthly vs. pay for a full year with a discount
The second big expense was the fee for our daughter's swim team.
We could pay for this monthly, or pay for the entire year at once, with a discount. The one-time payment would have been about $75 less than the sum of the monthly payments.
If we hadn't had the dog operation on top of this one, we would have paid the entire amount for the swim team up front, because the discount was significant.
But we made the determination that we couldn't pay for both of these up front without strapping us in other areas. Paying this fee by the month, though more expensive, was less of a risk.
So, despite the discount, we're paying for our daughter's swim team fee by the month. When choosing lump sum or installments, we chose installments.
Things to consider
I'll call out some of the questions that we asked when making these decisions:
- Is there a discount for paying up front? If so, how much?
It should be the case that paying up front is at least no more expensive than paying in installments. (There's rarely a reason to pay more if you're paying up front!)
But if there's no discount for paying up front, it becomes a tougher sell. The reason is that the money can be invested before it's paid, but not after.
It doesn't take a huge up-front discount to make it worthwhile to pay up front (all other things being equal). Savings accounts pay zero-point-diddly right now. Even a 5% discount is pretty good!
- What could happen if there's a lapse in payment?
The repercussions of this worried us enough that we paid in full for our dog's operations, even though we had the option of paying over time (up to 18 months) interest-free. Missing a payment could have cost us hundreds of dollars in retroactive interest, not to mention the ding on our credit reports.
If we missed a swim team payment? Not so much financially, but our daughter sure wouldn't be pleased with us.
- What about the broader context? Will it strap you?
If it made sense to pay both of these expenses in full, why didn't we?
Good deals always are taken in context. Since we have the bigger picture of our finances, we stepped back from paying both of them in full in light of some uncertainty in our financial picture. What could be a good deal one month could be foolhardy the next month.
If you've made a careful decision to buy something, make an equally careful decision how you pay for it.
