Straight Payment or Installment Scheme?

A straight payment often comes with big discounts, but the you get to keep your money longer with installment? What's the best choice?

Given the choice

Installment schemes are a great for us consumers, who may not always have cash on hand, especially for big purchases. However, there are times that we do, and thus, we have the choice between a straight payment or an installment scheme. This article covers the case when this choice is available. Often, the choice is such:

A straight payment can be anything from paying the whole amount in cash, through direct debit from you bank account, or through a single credit card payment. Regardless, a single amount for the whole purchase is transferred from the buyer to the seller. This is something that sellers like because they don’t have to wait for cash. And because of this, straight payments usually come with a discount, to encourage buyers to this mode of payment.

An installment scheme is one where payment is spread over a few months. Here, the buyer transfers a monthly charge, calculated from the total purchase amount divided by the number of months. For example, a bed that costs ₱30,000 paid through a 3-month installment, is paid as ₱10,000 for 3 months from the date of purchase. Installment schemes are most often done through credit card because the credit company will act as the third party placing the monthly charges on the buyer. While sellers like installment plans because it makes their pricier items more available for consumers to buy, they don’t like the fact that they won’t get all the money from a sale right away. This money for example, could have been used the buy more stock, so installment schemes can cause some delay. As such, while they would have offered an additional discount if the mode of payment is straight, they will not if an installment scheme is used. 

You have to do the what-if calculation

So is a straight payment always the option to choose, since you end up paying less? The answer is not always apparent, and it has to do with the what-if. You should always ask yourself, what would you do with the money in the time it is with you? Because that’s one implication of installment schemes, some money remains with you for a longer period. For a lot of people, that money would have stayed in a traditional bank earning very little to no interest. Here at Basta sa Bahay, we suggest that you compare the straight payment option to an installment scheme where you put the money in a digital bank like Tonik, that gives a significant interest per month.  The more complicated answer is that one should find the best investment for that money, be it stocks or a business. But this isn’t always available when you are making a decision like this. We like Tonik as an option because it easy to avail. 

Example 1: Cellphone

Given that, this is what that comparison looks like between a straight payment for a phone that we bought for ₱45,000, discounted to ₱44,000, and a 6-month installment with that money invested in Tonik

Straight Payment ₱44,000: This is a straight forward. You enjoy a discount of ₱1,000

6-Month Installment: ₱45,000 -*₱525 = ₱44,475: Here what we actually do is offset the amount by the interest that we earned by putting the money in Tonik. First, we calculate what the balance is. Since we pay a month later, Month 1 would have a balance of ₱45,000. Month 2 is when we pay our first installment amount of ₱45,000/6 = ₱7,500. Hence on Month 2, only ₱37,500 is in Tonik, and so on for months 3 to 6. Now the balance per month earns us interest, which we calculate (with some simplification that ignores different number of days per month) by multiplying it by 4% and dividing by 12. This is because 4% is a per annum rate. This means, in the installment option, there is an opportunity to have earned ₱525, or ₱420 minus tax, which we can offset from the price.

Month	Balance Earning Interest	Interest Earned
1	₱45,000	₱150
2	₱37,500	₱125
3	₱30,000	₱100
4	₱22,500	₱75
5	₱15,000	₱50
6	₱7,500	₱25
		₱525 >> ₱420

It’s clear to see that, a straight payment is cheaper. And it also means that if the straight payment involved only a ₱400 discount, it would be better to go for an installment scheme. I’ve also been in situations where the installment scheme is the promo itself. In other words, no further discount is given for straight payment. In this case, the installment scheme is the better option because you can put that money in Tonik to get interest.

Example 2: Real Estate Tax

Here, there is a total Real Estate Tax of ₱12k that the Pasig Government gives at 10% off if paid in whole the year before.

Straight Payment the year before: ₱12k - ₱1.2k = ₱10.8k (applying a 10% discount)

Installment: Pasig allows a quarterly installment with no interest fees. I apply another Tonik investment but this time, I can use a mix of their 6-month time deposit at 6% interest, and for quarter that I can't complete the 6-months (green cells), I use the usual 4% (blue cells). This assumes that you start your deposits the day before the quarter starts so you can pay on the last day of the quarter.

The interest earnings I can get after tax is ₱336. So offsetting from the payment amount, you pay ₱11.664k.

Again, straight payment wins.