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While buying electronic gadgets I get to pay the seller in two modes. I have never been able to evaluate which one is better.

Let's say I buy a phone worth INR 24,000. The seller offers me two options:

  1. Take the EMI option for 6 months and pay INR 4,000 every month.
  2. Pay the entire amount upfront and get discount of INR 1,000 effectively paying INR 23,000 for the phone.

How can I evaluate which one would be better? What other variables do I need to consider if I need to make this evaluation? Is there any simple formula which I can run through my mind and figure out at the time of buying as to which mode is better?

While using the EMI option there may be other charges involved here like processing fee, taxes and so on which I have not included. Do they need to be included for final calculation or they would make it even more complicated?

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  • @Yamikuronue: How did you arrive at the conclusion that if the fee is >1000 then paying upfront is better?
    – Naveen
    Jun 10, 2014 at 12:27
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    Your numbers don't make any sense. You have the option of paying Rs 23000 right now (with the Rs 1000 discount for cash payment) or to pay nothing now and only Rs 2000 per month for 6 months for a total payment of Rs 12,000? Unless the "fee" for the EMI arrangement is more than Rs 11,000 paid up front, why is there any question that the EMI deal is far better since you get the phone for half price? Jun 10, 2014 at 13:47
  • Is there a contract commitment with this phone? Do you have to buy phone service, a warranty, a service contract, or anything else?
    – NL7
    Jun 10, 2014 at 13:49
  • @Naveen Groggy logic first thing in the morning. I'll redo my comment. Jun 10, 2014 at 14:23
  • If there's a processing fee, and it's assessed once per payment, then paying it up front is better because of fewer fees. So yes, I'd say the amounts of fees and taxes probably matter, but only where they differ between the two options Jun 10, 2014 at 14:24

1 Answer 1

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The essence of your question is whether it's worth 1000 to you to spread the payments over half a year. The longer payment plan is just a loan and buying the loan costs you more money. The question is whether you think the loan is a good price. I suspect it's over-priced.

The classic financial analysis would be whether you could get a better return on the loan (opportunity costs). But we are talking about what are presumably not terribly big sums of money, so it may make more sense to analyze this amount of money in more personalized terms. In that case, remember to consider the convenience: is it significantly easier to budget with the 6-month plan? Watch out for other costs to the loan, such as late penalties and other loan fees.

If you find the periodic payments convenient (or you have a short-horizon, high-yield investment), then the 6-month loan might work. Otherwise, if you can afford it, it makes more sense to buy the phone upfront.

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  • The question is whether you think the loan is a good price this was exactly what I was looking for. So the conclusion I can derive here is that if I can afford paying the entire sum then it would be better to buy it upfront, considering I would have still have some money left to handle my other expenses. So just because the retailer offers EMI it wouldn't always be a good idea to go for it.
    – Naveen
    Jun 12, 2014 at 4:56
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    The loan is an expense on your part and you're buying the convenience of paying later. That's a somewhat subjective valuation, but it needs to be seen as an expense. It's a pretty universal rule that the default preference is usually for money over debt; if a vendor is accepting debt instead of money, you can be confident that the vendor expects to make more money by waiting.
    – NL7
    Jun 13, 2014 at 20:04

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