MANILA -- Who can say no to "gives"?
Apparently, not Filipinos who find it easier to say yes to purchases when it is offered via payment plans. "Gives" is actually slang for installment, or equal payments spread over an agreed period of time.
Even among friends, it is easier to buy or sell something when you agree to a "four-gives" payment period or longer. But while it may be easier on your pocket, not all installment purchases are good for you.
TURNING DOWN 100 OFFERS
Over the last ten weeks, I received 100 offers to pay for my credit card purchases alone on installment. Yes, I was counting as I bought groceries, started to shop for school supplies, switched to new carpets for the living room and refilled our prescription at the drugstore. The 100 count also includes SMS and emails, usually sent by credit card companies shortly after a sizable purchase.
Why do credit card companies actively market installment? The answer is simple – they stand to make more money, and not just from the interest you will pay on your short-term borrowing. Even if you opt for a 0 percent installment loan, they are banking on the chance that you will default on your payment at some point, or will be unable to settle your monthly outstanding balance and will pay only the minimum due. With 1.6 percent to 3.54 percent add on interest rates, your wallet and future cash flow will definitely take a hit.
But even knowing the perils of carrying installment balances on a credit card, many consumers still say yes. The concept of paying in "gives" is so popular with consumers rationalizing they can enjoy something now, say new 82-inch smart TV, that they cannot afford yet but can pay off over a few months or a couple of years.
SMARTER INSTALLMENT CHOICES
Of the 100 offers thrown at me, I admit I said yes to two of them. You don’t always have to say no especially when the offer makes sense, but then again, you don’t always have to say yes.
When next presented with an installment offer, consider these tips before you say yes:
1. PAY LATER. One of the offers I said yes to was a Pay Later pitch made at the time of my purchase. I was told I will pay for my purchase not this month, or next month but on my third statement date. No interest will be charged on the deferred payment and if you are familiar with the time value of money (TVM), that’s a really good deal. TVM means money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. With Pay Later, I get to hold on to my money longer, enjoying TVM by say investing it and possibly profiting from an investment, and start paying for my planned purchase later without interest fees.
2. PAY ZERO INTEREST. This is the second offer that tempted me to again sign on the dotted line. Credit card companies have generously reduced the minimum amount for installment. Years ago, it was P10,000, then P5,000 and now you can sign up for installment for as low as P3,000. If making a planned purchase – for example, gym membership – a zero interest scheme makes more sense for you. Instead of having to pay one-time big-time, you can manage your cash flow over your membership period and best of all, do it interest-free.
3. GIFTS WITH PURCHASE. With credit card companies luring consumers to buy on installment, another sweetener thrown in are gifts with purchase. Go around appliance stores and see that you can get a smaller TV free with the 82” you are eyeing and that can be tempting as you consider to have the bigger one for your entertainment room and the smaller one for your children to share. Take advantage only if: (1) the TV is a planned purchase which your future cash flow can cover; (2) if you need the smaller TV; and (3) better if you can get it on pay later and zero interest payment scheme. If #2 is a no, consider negotiating for a discount instead. TV is a depreciating asset and you only have one pair of eyes anyway.
4. TUITION. Wallets of parents around the world are hurting during back to school season. The cost of education is increasing and many Dads and Moms take out loans to help with tuition and back-to-school expenses that cover books, uniforms, shuttle service fees, canteen chits and so many more. In the United States, a recent survey showed that low-income parents are 10 times more likely to apply for a new credit card during enrollment season.
It is tempting to avail of installment to pay off the hefty tuition fees, but always rate shop. Credit card companies will offer different rates so choose the lowest one. You can also try and call them to negotiate a better rate – and if you’ve been a good customer, they may say yes. Check too if the school offers a better-priced installment scheme. Or how about getting a personal loan with fixed monthly payments so you don’t carry the risk of incurring higher interest rate should you default on your credit card.
One last note, with tuition, never say yes to a payment term longer than 12 months because this is an annual expense for your family. The last thing you want is to have to get a new loan next year while still paying off last year’s tuition.
5. INSURANCE PREMIUMS. The more assets you accumulate, the more you need to protect them. Insurance is one of those annual fixed expenses consumers have to budget for, and a payment scheme can give your wallet breathing room. Insurance companies generally offer payment terms and check if there are any fees associated with it before you say yes. You may also charge the cost to your credit card and see if the payment terms will be better for you, plus of course you earn rewards points or cash rebates, and possibly some instant gift if there is an ongoing promotion.
Again as with tuition fees, never say yes to a payment term longer than 12 months to fund this annual expense.
STICK TO PLANNED PURCHASES
Note repeated mention of planned purchases in all these tips. The worst thing you can do is say yes to installment for an impulse purchase. You will be paying for your sins – literally – for the length of your payment period, if not longer.