“Only 10% more” doesn’t always mean 10% interest. A simple example shows what an installment plan really costs you.
Installment plans are everywhere now, from phones and home appliances to everyday online shopping. The offers usually sound simple: “pay in four installments” or “just a little more than the cash price”. But to compare them properly, you need to know what that extra money buys: how much money, and for how long.
A simple example
Say you want something with a cash price of 10 million Tomans. The seller offers it in four installments of 2.75 million Tomans: the first on the day you buy, then one a month for three months.
The installments add up to 11 million Tomans: 1 million Tomans, or 10%, more than the cash price. So far, so simple. But what is that 10% paying for?
How much you actually borrow
You pay the first installment on day one, so you really borrow only 7.25 million Tomans, not 10 million. And you don’t repay that in one go after three months; you pay part of it back every month. So on average you hold even less than that.
If we treat the same payments as a loan, the cost comes to about 6.7% a month. That is around 81% a year as simple interest, and over 110% a year if the monthly cost compounds.
The same “10% more” looks very different next to a bank loan or a savings rate.
Before you buy in installments
- Ask for the real cash price. Sometimes the price on an installment plan is higher from the start, even when it says “no fees”.
- Add up the fees. Membership fees, setup charges and late-payment penalties are part of the real cost.
- Look at the timing. The bigger the first payment and the shorter the gaps between payments, the higher the real cost for the same extra amount.
- Compare with your alternative. If you have the cash, consider what that money would earn you over the same months.
- See all your installments together. Several small installment purchases can add up to a lot of pressure on your monthly budget.
How Darakav helps
In Darakav you can record each installment purchase with its payment schedule, see the due dates on your financial calendar, and know how much you owe each month and how much is left. That way you have a clear picture of what you already owe before your next purchase.
The numbers in this post are only an example and don’t represent any seller’s or company’s offer.