What is a payment plan?
Payment plans come in all kinds of flavors but have some common traits. Essentially, it’s a program where you get a product up front and pay for it over time. These can come directly from a store where you buy something or from a third party. Some places you do business with will be more aggressive than others with their marketing on this, but they are everywhere these days.
“The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.” Proverbs 21:5 ESV
Why do I get offers about payment plans?
Businesses want you to buy their stuff! Right now! Many businesses would rather put you on a payment plan than risk losing a potential sale. They also find ways to make money on fees and other charges when they extend payment options. Remember, it’s not because they’re being nice.
What kinds of businesses offer payments plans?
The major credit card companies have begun to push these types of programs more and more. You probably have an email about this in your inbox right now. Some even offer these automatically when you put a certain type of charge on your card. As an example, one provider will give you the option whenever they see you use our credit card for a medical procedure over a certain dollar amount.
Retailers have clever names for their payment plans like installment plans or the classic term: layaway. It’s all in service of the idea they want to “make the sale” today and take payment later.
Online businesses don’t want their brick and mortar counterparts to get all the action here. You’ve probably seen this when buying online. The most typical version of this is on the checkout page where you’re presented the option to pay for your purchase up front or break it up into “[insert number] easy payments”.
There are other types of businesses that offer these types of plans. One standout is doctors, hospitals, and other medical providers. These are unique and beyond the scope of this blog post. The number of factors at play with those types of plans means you need to perform a good deal of research before making a decision.
What’s the upside?
There is some convenience to buying when you want and not just when you have the cash available. These plans can also spread a large purchase into smaller fixed (same amount every month) payments over a period. Also, these offers will sometimes come without interest for a set amount of time.
What’s the downside/catch?
Although some of these plans will offer no-interest for a period, that does not mean you’re off the hook for interest. Even plans that do not accrue interest at first may begin to charge you interest at some point or in the event you miss a payment. For plans that do include interest, the rates charged can be high so be careful.
In lieu of interest, some companies will charge you a flat fee on the payment plan. This can be a fee upfront, tacked on to each payment, or some combination of the two. There’s also the possibility of late fees or other creatively named fees.
Credit Score Impact
Payment plans have the potential to negatively impact your credit score. This is more likely when you miss a payment. Some providers will try to sell you on a payment plan by telling you it will not be reported to credit bureaus. This is not necessarily true. Even if it is true, this can change without your permission. In other words, don’t enter one of these programs with the assumption your credit score will not be affected.
These plans go by all manners of creative and clever marketed names. At the end of the day, you are getting something and agreeing to pay back money later. It’s debt. Like any kind of debt, it is very easy to get in over your head and get into trouble.
“a state of being under obligation to pay or repay someone or something in return for something received : a state of owing” Debt as defined by Merriam-Webster Dictionary
Should I say yes?
Avoid these types of plans whenever possible. The possibilities of getting overextended with plans like these is too great. Even though some payment plans offer no interest, it does not mean that your money owed is not debt. Stay out of debt and stay out of trouble.
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