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I'm considering buying a service which will cost around £6000 (which I consider to be a significant amount). There is a financing option available which allows the amount to be paid off over 24 months, interest-free. It is structured as £250 pm for 24 months such that the entire balance will be paid off by the end.

Why would I pay as a lump sum instead of taking the loan? Assuming that repayments of the loan are paid back on time.

The loan conditions are stated as:

Rate of interest 0% per annum, total repayable £6,000. Total credit charge £0, representative 0% APR.

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  • Are you inquiring what your motivations would be for paying in an upfront lump sum vs on a payment plan? Or do you want to know what the seller's motivations are for offering a payment plan without interest if someone could afford to pay it upfront in whole?
    – Shorlan
    Commented Sep 5, 2019 at 21:30

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Convenience.

There’s a cost to making recurring payments, even if it’s not financial. You need to either set up the recurring payment and ensure you have enough in the account at each payment, or remember to make the payments manually, which takes time and effort.

From the vendor’s end, if the conditions for missed or late payments is fair, perhaps the offer is made for marketing rather than financial motives. That is, they want you to feel good buying from them - or perhaps they just want to keep their company name in your head, and instead of giving you stationery with their name embossed, they condition you to pay them on a monthly basis.

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    Good answer; I would add Risk as well. Many of these deals charge heavy interest retroactively if you miss one payment.
    – D Stanley
    Commented Sep 9, 2018 at 21:43
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Why would I pay as a lump sum instead of taking the loan?

As a counter-argument to the accepted answer... it's because you don't understand compound interest and Present Value.

According to the Excel =PV() function, the Present Value of 24 monthly payments of £250 each, at 6% (that's a reasonable rate at which the service vendor must borrow) is £5640.72.

Thus, you are paying £360 for the "convenience" of making a lump sum payment instead of 24 payments of £250.

Put the £6,000 in a high yield savings account and schedule automatic payments from that. At 2% APR, you'd earn about £240.

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Paying 24 x £250 is cheaper.

There are two problems: One, the company may speculate that you won't make all payments in time. Check how much it costs in that case. And check how much that company is able to manipulate when your money arrives, so even when you make payments in time, they may not be accepted. (Heard of payments that had to be made on a precise day and were not accepted if you paid early).

Two, assuming that they are honest, their service isn't worth £6,000. If you can get it for £6,000 making payments over two years, you should get it cheaper with one payment.

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