# To pay for something with installments, or not?

Let's say I want to buy something for 5000 and in my country we have 80% inflation yearly. Would it make sense to pay 5000 now, or pay in monthly instalments over 12 months for 5600? (that's the difference the credit card company asks) Which one would save me money, I wonder. I'm assuming I have the 5000 and I can pay it outright.

PS: Please assume that I won't keep the 5000 in my pocket during the 12 months, and invest it in some way that won't lose to the inflation, for example by buying some foreign currency.

• If you keep the money in the bank, what interest rate does it earn? Commented Aug 18, 2023 at 10:52
• This question appears to show good financial literacy and is asking for a mathematical formula. But every answer so far is giving a lecture on financial literacy 101 and lacks a real answer. All answerers thus far are making bad assumptions, IMO. Commented Aug 19, 2023 at 1:36
• I don't recall the formulas myself due to elapsed time, but I'm pretty sure there is a clear mathematical answer that the OP is looking for. Unless OP steps in to explain that my interpretation is incorrect. Commented Aug 19, 2023 at 3:14
• If I deposit it, it earns much less, maybe 30% . it's better to convert it to a foreign currency. At least it doesn't suffer from inflation then. For the sake of discussion I think we can assume that I will do something with that money that won't lose to the inflation (exchanging to a foreign currency for example) Commented Aug 26, 2023 at 12:03

This mainly depends on what you would do with the money instead.

If you would just keep it in your pocket (and it stays 5000), you can pay now, as both your debt and your 5000 lose value to inflation.

If you can invest it risk free in a way that you would have more than 5600 next year, it would be better to do so.

That being said, some thoughts:

High inflation is oftentimes accompanied by high interest rates. If you get more than 22% (this is what the credit card company charges you - but make sure it is in your currency) in your bank account or similar, you can just keep it there and make a profit.

If allowed in your country, you can maybe buy some stable foreign currencies, government or company bond, or a relatively stable commodity like gold. While their value might change, they should not be infected by your inflation and thus generate interest around the inflation rate. It bears the risk of laws changing in your country (e.g. you may not be able to access it anymore, or the government controls the exchange rate, then the "inflation gain" might depend on that official rate), and you may need to pay taxes on the gains.

Also, if you can estimate that you either need another credit within the year (and might need to pay more than 22% for it) or need to buy something else (that would be around 80% more expensive next year) where you don't have the credit card option, you could consider doing that instead.

Very generally speaking, for high inflation, spending your money (and even taking credit with low enough interest rates) for things that don't lose value as fast as the money, and that you thus can sell later for more money, is profitable. But since this will increase inflation (noone wants to keep the money, but spend it), the government might limit your options here. And if you legally can only buy things within your country, other people having the same idea as you might be driving prices up, thus reducing or neglecting the expected profit, or noone has the money or necessity to buy it back from you (e.g. a house in an area where all companies shut down might become worthless). And you always risk betting on the wrong horse, e.g. if you fill your oil tank today, assuming the prices are up 50% next winter, and the government then decides tomorrow to help out the people and give out free oil, you effectively lost the money. So "buying stuff now instead of later is good" is just a very general rule that might backfire, but I hope you got the idea.

You should also make sure that you estimated the inflation rate correctly, as a lot hinges on that. If the credit card company charges you 22% (which means they would lose money with 80% inflation), they may know more than you - as instead of lending you the money, they could, just as you, also buy US dollar (but again, they may not be allowed to, or forced to give that interest rate). Specifically, just because food and energy get 80% more expensive, doesn't mean US dollar, euro or gold also gain 80% against your currency, so the suggestion to buy it depends on your estimate being right and to also affect those. Maybe check the price development for the past (e.g. for dollar) against your inflation rate for the past. And also, the government may just be successful in lowering the inflation rate below 22% (which would be a risk for your specific scenario, but in general of course a good thing for your country and thus you).

• Sorry, -1 as you have not analyzed the time value of money that it appears the OP was asking for. There is no reason I see to assume that the OP does not understand basic financial literacy. I'll reverse my vote if either the OP clarifies this is what they are looking for, or if you add the information I think they are looking for. Commented Aug 19, 2023 at 1:38
• @AldusBumblebore: This answer does address the time value of money. The time value of money depends on what you're going to do with it in the elapsed time, and this answer explores how things work out for various possibilities of what you do with it. There is no way to simply compute the time value of money from the information in the question. Commented Aug 19, 2023 at 5:13
• @AldusBumblebore While OP can clarify they are looking for a formula, for me, they don't (especially since they didn't add the interest rate). For me, the question is: "I pay 22% interest on credit card. Should I pay now, or later." (while I am not sure if OP knows that rate, so I calculated it). And my answer is: "If you get more than 22% somewhere else, do that". I don't see where a formula would help making that any clearer. And that statement is true with or without inflation. But the high inflation seems to be the actual topic and makes OP's situation special, so I explored that a bit. Commented Aug 19, 2023 at 10:04
• @solarflare ok then what is the answer? It may be here but I can't see it. The question is asking for a apples-to-apples comparison between X% inflation and Y% interest on debt. Frankly, it looks to me like he should take on the debt. But there might be a difference in meaning between a percent of inflation and a percent of interest. In my interpretation that is the crux of the question. All the above is good commentary but lacks the conclusion, IMO. Commented Aug 20, 2023 at 2:11
• @solarflare It appears to a layperson like me that inflation is like an interest on holding cash. But are the percentages directly comparable? I believe that is the essence of the question. I might be wrong. Commented Aug 20, 2023 at 2:22

"Inflation" is a very broad measure of purchasing power decline, and doesn't affect all aspects of your budget equally. You might find that some things grow in price at more than inflation, and some less, which is why inflation is measured as a broad average. So you can't always "profit" from inflation by borrowing money at less than the inflation rate.

One way to do so is to pay off other debts that are at a higher interest rate than what you borrowed, which is generally hard to do unless you have some really bad debt.

Other than that, you could buy non-perishable items that you would have bought later anyway before they go up in price, but considering that the "profit" will only be the different between your actual inflation rate based on what you buy and the interest paid on the installments, you're probably not really accomplishing anything (what are you going to buy a year later that will go up in price by 80% that you could buy now instead?)

• Sorry, -1 as you have not analyzed the time value of money that it appears the OP was asking for. There is no reason I see to assume that the OP does not understand basic financial literacy. I'll reverse my vote if either the OP clarifies this is what they are looking for, or if you add the information I think they are looking for. Commented Aug 19, 2023 at 1:39
• Installments. You only pay the first one and walk away because this question doesn't mention interest. +1 Commented Aug 19, 2023 at 1:45

The answer comes down to one thing: Is the present value(PV) of a stream of monthly cash flows for 1 year totalling 5600 greater/less than the price they are asking for now, 5000. If PV is greater you should buy now for 5000 if it's less then you should choose the second option.

The difficulty here is on calculating the PV of the future cash flows in the second option. It depends on the fees of risk free deposits for 1 month, 2 months, ... , 12 months.

You could try with different sets of rates you have access to and use those to calculate the PV.

• Sorry, -1 as you have not analyzed the time value of money that it appears the OP was asking for. There is no reason I see to assume that the OP does not understand basic financial literacy. I'll reverse my vote if either the OP clarifies this is what they are looking for, or if you add the information I think they are looking for. Commented Aug 19, 2023 at 1:39
• Many thanks for the feedback. My point was, "what is the threshold at which the installments become disadvantageous to choose. That is, if the bank asks for 5600 to divide it into installments, is that a good deal? Or what if they asked for 6000 instead? is that still good, etc. Commented Aug 26, 2023 at 11:54