Who does not know it? The cell phone breaks down. You need a new one. Buying a cell phone in installments together with a contract is standard today and is the first option offered by telecommunications providers. If you want to pay for your cell phone right away, you have to specifically select this option. Installment payments sound tempting. What is 20 € for the new iPhone? And with 0% financing. So the cell phone won’t cost a cent more, regardless of whether you pay for it outright or pay it off in €20 installments.
The same applies to washing machines, televisions and all kinds of electronic products. Some payment providers now offer installment purchases as standard. You don’t pay the full price at the time of purchase but in 4 installments, payable every two weeks. It’s no longer just expensive electronics or furniture that can be bought in installments. Rate payments are also offered for everyday products, whether in brick and mortar or online stores.
How do rate payments work?
When you pay by installments, you don’t pay the full amount immediately. Instead, you agree with the merchant on a period of time and an amount for the installments. For example, you buy something for 100 euros and then pay it in 5 rates of 20 euros. You get the goods immediately. You pay 20€ every month until the 100 euros are paid off.
The installment purchase is a kind of credit and it may be that you have to pay interest in addition to the purchase price. So pay attention to whether there is interest or the total purchase price is higher if you buy something on installments instead of paying it in full right away.
Most of the time, installment purchases are not offered directly by the merchant you buy something from but by a third-party service provider, such as Klarna or RatePay. The merchant works with these service providers because they don’t want to bear the risk that you might not be able to pay.
Your creditworthiness is checked
If you decide to buy in installments, your creditworthiness will be checked in the background. Most of the time you will not be aware of this. The data you entered before selecting the payment method, i.e. your name, date of birth and address, are compared with the data that a credit bureau has stored about you and your payment history.
More about credit bureaus and creditworthiness: What is creditworthiness and what data does Schufa have about me?
The current request for an installment purchase is also registered at the credit bureau. All inquiries and submitted data contribute to your credit score. First of all, an inquiry for an installment purchase is a negative feature. However, if you always pay your installments in full and on time, the installment purchase can gradually become a positive feature for your credit rating.
What happens if I do not pay?
Your rates must be paid regularly and in full by you. If you default, this is a negative factor for your credit rating, which is stored by credit bureaus.
Sometimes you wonder after an installment purchase, by whom you receive invoices because you do not even notice during the purchase that the payment is made through a service provider. Then sometimes you don’t get your invoice from the online store, but from the service provider who handles the installment purchase. If you do not know the name of the service provider, you may think that there was a mistake and that you never bought anything from this company. Take a close look at the invoice: All the details about your purchase and what you are getting the invoice for are on there. You can also ask the company from which you received the invoice or reminder. They can tell you which supplier you bought something from and to which invoice the claim belongs.
Does buying in installments make sense for me?
You can decide on a case-by-case basis whether it makes sense to pay in installments. It might be a good solution to pay for online purchases by invoice if you expect to return a large portion of the items you ordered. So if you order several pairs of pants or tops and are likely to keep only part of them, buying on account is a good option because after trying them on, you pay only for the parts you want to keep.
The big advantage of buying by installment is flexibility in payment. You can buy something now that you don’t actually have the money for. You should limit yourself to really important things: a washing machine, a refrigerator or a computer can be such things. Buying a car in installments can also make sense if you need it to get to work. The computer, however, should only be paid in rate payments if you need it to get to work or find a job. You can save up for a computer to gamble on for a little longer. Think about whether you really need the purchase to live. Be honest with yourself about whether the purchase is really necessary for your professional advancement or daily life.
Being flexible also means keeping track of what bills and installments still need to be paid. So if you find it easy to pay outstanding bills on time, you can think about buying in installments. Do you tend to overestimate your financial possibilities? Do you tend to forget about other expenses? Do you often pay your bills late? Then try to avoid installment purchases and save before you buy something. Installment purchases are a high risk for you to slip into over-indebtedness.
Risks of buying in installments
If you haven’t organized your finances properly yet, installment purchases can quickly lead to problems. Many people still pay the first installments on time but get into trouble after two or three months. Merchants and payment service providers make good money from this behavior. If you don’t pay on time, you get reminders and reminder fees. Thus, the installment purchase can quickly become expensive.
If you are not absolutely sure that you can pay the installments on time and think: “It will work out somehow”, then installments are not for you. That’s because the risks of paying in installments are high. Even if it sounds great at first to get something now and not have to pay until later, you must not overestimate yourself. Coordinating different installment payments can quickly become difficult. 50 euros a month doesn’t seem like much at first, but if you have to make three 50-euro payments and a back payment for utilities, it could be too much for you. If you can’t pay on time, this affects your credit rating. Getting the next installment payment or the next apartment will then be more difficult. Or significantly more expensive. In general, payment by installments should only be chosen for short-term financial bottlenecks and really important purchases and should remain the exception.