The easy payment trap

Many years ago, I used to wonder about the Western culture of buying things based on a monthly instalment plan. For instance, you could buy clothes or household appliances on a whim and pay for them in a series of regular monthly payments over a set period of time.

So you wouldn’t have to pay the $300 (Sh30, 000) for the item you desired upfront,  but instead, when you bought it through a store card on an instalment plan, you’d just had to pay something like $15 (Sh1, 500) a month for three years. If a new phone came out, you didn’t have to worry about not being able to afford it, after all, you could always take it on a (monthly payment) plan. Seems like such a bargain, right?

Now, years later, we are living like that here in Kenya. New cars are now advertised not based on the total cost of the car, but on the monthly instalments you can pay for it. Even when the dealer wants all his money upfront, we judge our ability to afford the car based on the monthly repayments of the car loan we will take to buy it.

I’ve also seen posters outside furniture shops advertising a fantastic couch for Sh20,000 a month. From a business perspective, it makes sense to sell things in this way because, when will customers ever save a lump sum of Sh400, 000 to buy the sofa in cash? It is easier to get people to buy it if you tell them that they’ll just have to pay Sh20, 000 a month for a couple of years. Suddenly, something that was unaffordable becomes “affordable”.

QUICK FIX

Don’t have money for school fees? Let the Sacco loan make life easier. Don’t want your friends to know that money has run out and you actually can’t afford to be at the bar? Bring out the credit card. Want new clothes and shoes? Go to your friend who owns the shop and “malipo rahisi” can be organised.

It sounds very convenient, but it is not. There are dangers of seeing the price of things based on a payment plan. Firstly, you’ll never really look at the price. If you are buying a car, the cost is not the manageable Sh25, 000 you need to service the car loan every month; the cost is the entire cost of the car – the one million shillings that has been broken down into easy payments.

So your decision to buy the car should be based on whether you have a million shillings and not whether you can afford to pay Sh25, 000 a month. When you buy that car on an instalment plan, you end up paying Sh1.5 million because of interest. Are you really ready to pay Sh1.5 million for a car which will be worth a third of that (Sh500, 000) after five years?

You also need to look at what you are foregoing to make that monthly payment. After buying that car on loan, you realise that you can now not afford to pay school fees, so you take a school fees loan and another loan for insurance and so on. Now you are entrapped by a series of monthly repayments that leave you no room to breathe.  Before you sign up to pay for something in monthly instalments, you need to do a realistic budget and check if you can actually afford to pay the monthly instalments without your life falling apart.

Another problem with buying things on a plan is that you sacrifice money that could have been invested. One way of knowing that you can’t afford something is to evaluate if after you are done paying for the item in five years, you won’t have true assets or investments that are greater than the total spent paying for that item.

Fourthly, monthly payments stop us from saving for anything. If you can buy now and pay slowly, you’ll have no incentive to save up for big ticket items. People are no longer saving for holidays because they can be financed.

START SAVING

Instead of taking a holiday loan in December, why not save the amount you would spend on repaying the loan every month for 12 months and go on holiday debt-free? Saving up will allow you to see how much of a holiday you can actually afford and you won’t be left struggling to repay a loan after the fact.

How about saving for that car you want using the cash you would make repayments with?

If you buy it after 12 months of saving, you would only need to borrow a portion of the cost of the car hence it will cost less because you’d pay less interest. Better still, if you save the monthly repayment amount for three years, you can buy the car in cash!

In most places buying in cash gets you better prices. So instead of paying one million shillings you may end up paying Sh900, 000. If you want to replace your car in three years, start saving now.

When the monthly repayment becomes a way of life, we also tend to make it our motive to earn more money. Many people want to earn an extra Sh30,000 simply because they have either overextended themselves and need to make their payments or they want it to buy something else that will cost that amount of money on a monthly basis. 

That’s not a good reason to be paid more. Your motive for more should be because of the value you provide and it should give you ability to grow actual wealth. So don’t live your financial life through the eyes of monthly repayments.