Pay in installments has become one “usual activity”, especially in moderately “large” purchases, taking into account the context of crisis that the country is going through, such as the purchase of a cell phone or the acquisition of a new box spring.
However, doubts often arise about in what context is it “rentable” pay a purchase in installments and at what times it is better to cancel it in one payment.
How do I know if I should pay in installments?
One of the easiest ways to know if it is convenient to pay in installments is analyze the total financial cost of the operation.
In the case of interest-free fees” and assuming that it is the same price as making the purchase in a payment, the best option is pay in installments, even if you have the money to do it in one payment.
This is because you can place the money in a mutual fund money market o in one fixed term and gradually withdraw part of the capital to meet the quotas. At the end of the payments, you will have money left over, the product of the interest generated in that span.
In the event that they charge you or offer you a “discount” for cash payment, you must analyze how much is that discount and how many are the dues what they offer you
For example, if a cell phone that costs $200,000 has 12 interest-free installments or a 20% discount, you should analyze how much money you would get for placing that $140,000 (original amount minus the bonus) in a fixed term for one year.
Given a discount, it is important to compare it with the “potential interest” that you could generate if you paid in installments and invested the money
In this case, assuming that the interest rate fixed term deposits is maintained, you would get a rate of 107.05%. That is, after 12 months, you would make $289,870, enough to pay off the $200,000 and make a “profit” of $89,870.
However, it is highly likely that each month you will make a withdrawal to pay las dues, so the money you will get in the end will be much less. In this case, assuming that you place $140,000 at a rate of 6.25% per month and withdraw $16,666 per month (renewing the balance), you will obtain, after paying the installments, a benefit of approximately $4,369.
How does installment payment work?
He payment in installments works as follows: the issuing bank of the credit card delivers the total amount of money to the merchant in which the transaction was made. Then he will charge a interest for “lend” that money (usually they use the money from the deposits they receive as, for example, fixed terms).
In other cases, such as Mercado Libre, the interest is absorbed by the merchant, that is, it discount and percentage of the sale to the merchant to cover the costs of financing said sale (very common in “interest-free installments”).
However, in general, this percentage is usually recharged by the merchants in the list price, offering the price without said percentage as a “discount” by payment in cash or in one payment.
How to calculate the interest of installments?
For calculate the interest of the installments that you must pay, you will have to analyze if they charge you “simple interest” or “compound interest”.
In the case of simple interest You must take the capital to be financed in installments and apply the corresponding interest. Then, you will divide it by the number of installments and you will obtain the amount to pay.
When incurring interest, it is important to know if a simple or compound interest rate will be applied
For example, if the principal is $100,000 with a TNA 120% and paid in 3 installments, you must pass the nominal annual rate a quarterly nominal rate. In this case it would be 30%. Then, by multiplying by the principal, you would get $130,000 and divide that amount by 3 (number of payments). In this case, you should pay approximately $43,333.33 per month.
When should you buy with a credit card?
As long as the payment in installments be equal to cash payment or the interest is especially low, and place he money in some kind of investment as a FCI money market, It is advisable to make the purchase with a credit card.
It is also usually a great option at the beginning of the month, since, when making a purchase in one payment (which does not have any type of surcharge) the capital can be placed in some type of low risk investment and get interests throughout the month.
In this way, the following month, you will pay the price paid with the credit card and you will have obtained a interest for that capital, which, ultimately, is a lower final price of the good or service.