Pay now or later?

Michael wants to buy a moped. But it’s pretty costly. If Michael works all summer, and weekends, it’s still going to take almost a year to save up for it... But Michael wants his moped now. ...Aha! ...The store invites Michael to buy the moped in installments -- a credit purchase. Then he’ll pay a smaller amount each month.

And he can ride home on his moped right away! Sounds good, doesn’t it? Buy now, and pay later? No. Wait a moment Michael, let’s do the maths first!

Here’s the plan for the installments. ... A smaller amount is to be paid each month - for 24 months -- two years. Now, we can compare. Add up all the payments for the credit purchase: the monthly installment, times number of months. And then the store adds an arrangement fee apparently, which you pay here and now.

Add that. So, the choice is between: Pay now. Or, pay quite a lot more, later. ... The difference between the two amounts, shows how much more it costs to buy on credit -- it’s the total borrowing cost. Ask yourself, whether you think it’s worth paying the total cost of borrowing, in addition to the price of the moped, just to get hold of it a bit earlier? … Spoiled your day there, did we?

Yeah, it’s more fun to get the stuff you want right away… ...but often it’s quite expensive. But sometimes, it’s actually worth it. Like this: Say you buy the moped today, and pay in installments, and that because you are doing that, you can get a better summer job, where you make more money. You might make so much more money on that other job, that the higher income will cover the entire cost of borrowing. In that case, you’ll benefit from buying now and paying later. … It works the same way if you take a student loan, in order to afford going to university.

Here’s a timeline, from now to retirement. … And here’s your salary, year by year, if you don’t go on to study. Now, if instead you take out a student loan, you’ll have to pay installments on that, for many years. And you’ll miss out a few years of income, while you’re studying. So it’s going to cost you a lot to study. But if you choose the right subject and work hard, you’re probably going to earn a higher salary, later.

And if you calculate your expected life income, and compare, then it’s likely that you’ll benefit from taking a loan to study. So, buying on credit, or paying-in -installments, is a way to borrow. Borrowing for consumption is rarely a smart thing to do. Sure, you’ll get your things earlier, but you’ll have less money to spend on the stuff you want -- since some of your money must go to pay interest. If you borrow in order to take on a job, or to get an education, then your loan is part of an investment, in your future.

And that can be beneficial, even if you have to pay interest.