Interest-free instalments: how to know what you already owe next month
A purchase split over 12 interest-free months does not cost less. It costs the same, spread across twelve months you have not lived yet.
In short
Interest-free instalments are free in interest and expensive in commitment: each purchase fixes a monthly payment until it ends, and the trouble starts when four or five run at once. The number to watch is not the price of the purchase but the sum of every instalment already due next month. Above 20 to 25% of income, the next offer stops being an opportunity.
Roughly a third of card users in Mexico buy on interest-free months, and the same product now exists nearly everywhere under the name buy now, pay later. Used well there is nothing wrong with it: it is borrowed money for free. The problem is never one purchase, it is the sum, and nobody is shown the sum.
Why they pile up unnoticed
Each purchase is decided alone. At the till you think "that is 900 a month, I can pay that", and you are right. Three months later four plans are running from four separate moments, each reasonable, and together they are 3 600 a month that you never decided.
Nobody shows you that total. The statement tells you what you pay this month; what is already committed for the next eleven appears on no screen at all.
The three numbers
1 decision
What you see when you accept
The price divided by 12, which always looks small
12 decisions
What you are actually carrying
Every active instalment for next month, added up
20-25%
Where it starts to hurt
Once instalments take more than that of income, there is no room left for a bad month
The credit line freezes in full on day one
A detail that surprises people: when you buy something over 12 months, the whole amount comes off your credit limit on the first day, not gradually. Buying something at 24 000 over a year leaves 24 000 less available today, even though you have paid one instalment.
It is why a card fills up without you having spent much this month, and why a real emergency finds you with no room exactly when you need it.
When they are worth taking
Without drama: there are three conditions, and when all three hold, interest-free instalments are good.
- You were buying it anyway. The offer cannot be the reason. "It is interest-free" is not a reason to buy something, it is a way to pay for something you already decided on.
- The price is not inflated by the offer. Compare against the cash price elsewhere. Sometimes the free financing is already inside the price.
- The instalment fits the total. Not your month: the total of instalments you already carry. This is the step that always gets skipped.
How to keep track
All that is needed is for the instalments to exist somewhere as a future commitment rather than as a one-off expense on the day you bought.
Record each instalment purchase as a recurring payment with a start date and an end date. Then next month has a number — the sum of the active instalments — before it begins, and the next offer is decided against that number rather than against the enthusiasm of the moment.
When one ends, the total drops on its own, and that shows too. It is the pleasant part: there is a month where you get back 900 that were no longer yours.
If there are already too many
Interest-free instalments cannot be refinanced and there is no point paying them early: settling early saves no interest, because there is none. What is left is to add no new ones until the total falls, and meanwhile attack the debt that does charge interest, which is the one costing real money. It is worked through with numbers in how to get out of debt.
Common questions
- Is it worth paying off an interest-free instalment plan early?
- There is no saving in it: no interest is charged, so paying early only takes cash out of your hands today. The exception is when it frees up credit line you need for something else.
- Do interest-free instalments affect my credit history?
- Paying on time builds it, like any credit. What can work against you is a heavily used line, because the whole amount is frozen from day one even though you pay it off gradually.
- How many plans at once are too many?
- It is not a count, it is a percentage. Add up every instalment due next month and divide by your monthly income. Above 20 to 25%, anything unexpected ends up paid for with more debt.
- How do I record a 12-month purchase in an expense tracker?
- Not as a 24 000 expense on the day you bought it, because that distorts the whole month. As a recurring payment of the instalment, with a start and an end date, so it appears in the twelve months where it actually happens.
Try it on your own money
Caudal is an expense tracker in Spanish, English and Russian. Several currencies, goals, debts, a shared household budget. Recording an expense takes three seconds.
Start free