48% of Consumers Don’t Trust Installment Plans: Here’s How to Avoid Overspending

Installment plans seem like a dream. You get whatever you want now and pay for it slowly over time.

But beware, these “buy now, pay later” schemes have a dark side. Nearly half of consumers don’t trust installment plans, worried they could lead to overspending.

Are their concerns justified? Let’s take a closer look at the pros, cons, and psychology behind installment plans to see how you can avoid overspending while still enjoying the benefits that these plans provide.

Understanding Installment Plans

An installment plan allows you to spread out payments for a purchase over a set period of time, often several months. You take home the item immediately but pay for it in installments.

These plans are offered directly by retailers as financing or through third-party companies. Installment plans attract shoppers because they offer instant gratification. You get to enjoy the new TV, laptop, furniture, or whatever item right away.

The purchase feels more affordable when the cost is broken into small, regular payments. For expensive items, not having to pay the full price upfront can be a lifesaver.

But installment plans aren’t all-in-one solutions. You are still purchasing and owing the full amount, with interest, and not everyone uses them responsibly.

Key Takeaway: Installment plans let you pay for an item over time rather than upfront in one lump sum. They can be tempting for expensive items, but beware of the potential downsides.

Why Some Consumers Don’t Trust Installment Plans

On the surface, installment plans seem like an easy solution. However, upon closer inspection, some worrisome issues emerge:

• Deceptive fees – Plans sometimes have late fees, early repayment fees, or other penalties that aren’t clearly disclosed.
• High-interest rates – If not paid off quickly, the interest charges can add substantially to the total cost. The rates can be as high as 30%.
• Overspending risk – The psychology of “buy now, pay later” makes it very easy to overspend.

Research backs up these concerns. A recent Credit Karma survey found that 85% of shoppers feel stressed after using installment plans. They regret overspending and struggle with payments.

Let’s explore how installment plans lead to overspending next.

Key Takeaway: Some consumers don’t trust installment plans because of deceptive fees, high-interest rates, and the risk of overspending. Research shows that many people feel stressed after using these plans.

The Dangers of Overspending With Installment Plans

Installment plans disrupt our normal financial restraints. Research by Princeton neuroscientists shows that paying in installments activates different areas of the brain compared to paying in full. Using installment plans reduces pain and risk signals in the brain.

Without the immediate sting of parting with a large lump of cash, we have one less brake on spending. The cost feels abstract and spread out over many future payments. This “decoupling effect” encourages overspending in several devious ways.

• It leads to buying more expensive items – without a lump sum as a deterrent.
• It leads to purchasing more unnecessary “wants,” not just “needs.”
• There is less urgency to compare shops for lower prices or alternatives
• It may cause you not to consider the impact on the overall budget.

Before you know it, you have an arsenal of new clothes and gadgets bought on autopilot but don’t have the cash flow to cover all the installment payments.

Key Takeaway: Using installment plans can lead to overspending because of the psychological “decoupling effect” that reduces the pain and risk signals in our brains. This makes us more likely to make impulsive purchases and buy items we may not truly need.

Strategies to Avoid Overspending

Installment plans require self-awareness and discipline to avoid overuse. Here are five tips to keep your spending in check.

• Always make a budget first – Do the math to confirm you can truly afford the monthly payments over the loan term before signing up. Be realistic.
• Read the fine print – Scrutinize fees, APR, early payoff details, etc., to avoid surprises. Ask clarifying questions if you don’t understand. Don’t rely on verbal promises alone.
• Limit to essential big-ticket purchases only – Reserve installment plans for necessary big-ticket expenses like medical procedures or replacing broken appliances. Avoid frivolous discretionary items.
• Consider cheaper alternatives first – Can you buy a used version, wait for a sale, or substitute a less pricey option? Explore ways to get the item for less before turning to financing.
• Pause and ask, “Do I really need this?” – Institute a mandatory waiting period before any installment purchase. Give yourself a few days to consider if it’s truly a well-thought-out decision.

A little self-control goes a long way. The goal is to keep installment plans to well-planned purchases you can actually afford.

Key Takeaway: By setting a budget, reading the fine print, limiting use to essential purchases, considering cheaper alternatives, and pausing before making a purchase, you can avoid overspending with installment plans.

Trustworthy Alternatives to Installment Plans

If you are not comfortable using installment plans, other options may work better for you. Here are a few to consider.

• Save up to buy – Old-fashioned saving may take patience and discipline, but avoids debt completely.
• Personal loans – This may offer lower interest rates and fees compared to retail installment loans. Online lenders like Level offer very competitive rates and an uncomplicated application process.
• Buy second hand – Consider used or refurbished versions, which cost significantly less upfront. Sites like Craigslist and eBay open up lots of options.
• Pay with a credit card – A credit card lets you pay over time, like installment plans, but with the protections of a credit card. It can help build credit, too.

The right option depends on your purchase, timeframe, credit status, and personal preferences. Do your research to find the optimal payment method for each situation.

Key Takeaway: Trustworthy alternatives to installment plans include saving up to buy, using a credit union personal loan, buying secondhand, or paying with a secured credit card. Weigh the pros and cons of each option before making a decision.

Final Thoughts

Installment plans are not intrinsically bad but do require caution. When used wisely for affordable purchases, they can be an effective financial tool. Take the time to fully understand the terms and ensure it aligns with your budget and needs.

A little prudence goes a long way toward avoiding installment plan pitfalls and overspending. With the right mindset, you can strategically tap into the upside of installment plans without the downside of debt.