How Those “Easy Payments” Can Wreck Your Finances

by Joe Plemon on September 13, 2010

Don't get bitten by "easy payments"!

John and Deborah are a young married couple with decent jobs, bringing home $5,000 a month. Tired of their hand me down couch, they responded to a newspaper ad which claimed, “Easy Payments: 24 Months Same As Cash!” Once they saw … and sat on the leather couch, they knew it (and the matching love seat) were meant for them. And that new dining room suite was perfect for family gatherings (no more card tables and folding chairs!). Yes, the furniture did seem a bit pricey, but their payments would only be $375 a month. “It might be a little tight, but we can make it work” they agreed. “After all, we aren’t going to be paying any interest for two whole years.

Does this sound familiar? Do you justify your purchases because you can make those “easy payments”? Listen up: you are digging a hole that is going to eventually swallow you. Easy payments do not make life good; they are a recipe for ruin.

Let’s look at John and Deborah’s finances a bit closer. With their $5,000 income, they pay $1,200 for mortgage and escrow, $600 for two “easy” car payments, $250 for TV and computer (more easy payments), $200 for kitchen appliances (easy payments again), $150 on various credit cards (even more easy payments) and now $375 for furniture. That leaves them $2,225. Not bad. But they pay $400 a month for health insurance and another $500 for utilities, cell phones and satellite TV. Gasoline is $400 (they both commute) and they spend another $800 for food (they eat out a lot). That $5000 is now down to $125. They did say that things would be a bit tight, didn’t they? Did I mention that they have no savings?

Here are the problems with easy payments:

  • They keep you in debt forever.

The reason the payments seem easy is because they are stretched out longer, ensuring that the debt will not go away.

  • High interest

The longer any payment is stretched out, the more interest you pay. For example, they could well be paying $250 interest (not including the mortgage) on all of those “easy payments” every month, and if they ever hiccup on the furniture payments, the interest (24.99%) will kick in for the entire 24 months: a penalty of about $2500.

  • They mess with your mind.

Did you notice that John and Deborah didn’t even consider how much they were paying for the furniture? With “easy” payments, your mind is shielded from the actual debt as you focus on what you can think you can afford monthly.

  • You can easily get in over your head.

Obviously, John and Deborah are a train wreck waiting to happen. But they are not atypical. The phrase “easy payment” sounds…well, easy. Don’t fall for it.

How easy payments can wreck your finances:

  • Wrong priorities.

Of course easy payments are not the real culprit. John and Deborah signed up of their own volition and are responsible for their decisions. However, easy payments tempted them to go into debt for furniture instead of learning to save and pay cash. The bigger picture is that they strapped themselves so tightly that they aren’t able to save for an emergency fund or invest for retirement. Their priorities are out of whack.

  • Life will happen.

Our couple has no margin in their lives. What if:

  1. A car breaks down? They would use plastic to fix it, thus succumbing to more debt and bigger payments.
  2. Deborah gets pregnant? The option of being a stay at home mom is not on the table. Besides, babies bring on more expenses. Where will the money come from?
  3. John or Deborah has medical issues which prevent them from working? They could lose their furniture, get one or both cars repossessed and be facing a foreclosure on their house.
  4. Either of them has a job layoff?  Similar scenario as medical issues.

What should John and Deborah do?

  • Realize they are in crisis before it gets worse.

The time for action is now. They are already in a crisis and need to realize it. Action will never happen until those who need to act are motivated to do so. They need to move from la-la land to reality. Some healthy anxiety is needed now.

  • Get out of debt.

They must develop a plan to get out of debt and they must be willing to live sacrificially until the debt is gone. For example, they could sell one or both cars and drive clunkers, quit eating out and get rid of satellite TV. One or both of them should consider getting a part time job until the debt is gone.

  • Build emergency fund.

They should build a small emergency fund before even starting on debt reduction, then build a big one (at least 3-6 months of expenses) after the debt is gone.

  • Think long term.

Imagine John and Deborah three years from now. Both decided to get part time jobs and although they are tired, they are also very happy. All debt other than their house is gone and they are making great progress on their emergency fund. They have learned their lesson and are committed to never borrowing again. They have a great peace in their lives and , although they haven’t started a family yet, they are discussing the possibility of Deborah staying home when that event takes place. Their future is bright.

Does John and Deborah’s story bear any similarity to your own? If so, where are you at: In crisis? Working on debt? Out of debt? Any tips for other readers to help them on their journeys?

Creative Commons License photo credit: Mr. T in DC

Creative Commons License photo credit: eamoncurry123


{ 13 comments… read them below or add one }

Kevin@InvestItWisely September 13, 2010 at 12:21 pm

I believe it’s important to maintain a healthy gap between income and expenses. I agree, the problem with those “easy payments” is that it’s all too easy to fill up your spending with them, and then you have no breathing room if something else comes up!

I’ll still take advantage if I can get a 0% interest deal, keeping the safety buffer in mind.


Suba @ Wealth Informatics September 13, 2010 at 1:16 pm

I would recommend making the easy payment to themselves for a period of time “before” making the purchase. That way the amount set aside will stay in a separate account ready for a pay off if that is needed. If they have a way to earn good interest (High interest saving or reward checking or similar) then they could make automated payments from that account and use the 0% offer as well. We put everything in credit card too to earn rewards or 0% offer, but not until we have the money to pay it off today.


joeplemon September 13, 2010 at 1:35 pm

I agree to keep a healthy gap between income and expenses. But I believe in allocating all income so you have a savings and investing plan for that healthy gap amount. Are we saying the same thing?

Your plan is way better than John and Deborah’s plan, but I would rather just save up and pay for whatever I have saved for. Much simpler and no payments ever (the thought of making payments raises my blood pressure). Besides, you can sometimes negotiate a much better deal when paying cash than you could by agreeing to a 0% loan.


Kevin@InvestItWisely September 13, 2010 at 1:48 pm

Hi Joe,

Without going into details, yep, we are saying the same thing. Just letting all of the money pool in the chequing to be potentially consumed at any point is not a great plan.


Kevin@InvestItWisely September 13, 2010 at 1:51 pm

P.S. Your comment about payments raising your blood pressure made me laugh 😉 It’s true, if you have a bunch of automated payments on your account I think it could get quite annoying, and it’s even more annoying when it has to be done manually, like rent.


Carol@inthetrenches September 13, 2010 at 2:00 pm

Yes, been there, done that. This was my thinking before my father became terminally ill. When I had to leave my job to care for him our financial house collasped like the house of cards that it was.

Easy payments count on an income in the future. How many have been dupped by thinking they could foretell the future?


joeplemon September 13, 2010 at 3:08 pm

“Easy payments count on an income in the future. How many have been duped by thinking they could foretell the future?” You make an obvious but great point. Most people naively assume that the future is not going to be different than today. “Duped” is a great word.


Daniel September 14, 2010 at 12:16 pm

This is why budgets are so helpful! You can see in advance whether or not you can afford the “easy payments.” If you’re committed to sticking to your budget, then you can make smart decisions about whether it’s worth it or if it’s a budget-buster.


joeplemon September 14, 2010 at 1:45 pm

You are right of course, but the insidious thing about “easy payments” is that people who do have budgets fall for them. Why? Because they figure they can squeeze another $50 a month out of their budget without ever considering the total debt load they are accumulating. That is why a responsible budget should include not only monthly income and outgo, but also total equity (net worth) so people can see what more debt is doing to them.


Carol@inthetrenches September 14, 2010 at 1:59 pm

I think Joe makes a great point about the balance sheet. Most items bought on “easy payments” depreciate by almost 50% the minute you take them out of the store. Used is used. When you add the interest on top of that the balance sheet really shows the hit.


Mandy June September 14, 2010 at 4:38 pm

Easy payments sound nice but they’re really not! They get us into this kind of laid back attitude where we think we can just take it easy paying things back, but we all know that the interest is building up and fast, too!


Khaleef @ KNS Financial September 20, 2010 at 1:24 pm

The thing I hate most about these easy payments is that they make people focus on a monthly amount, rather than the total cost. Most people who purchase a new car don’t know how much they paid. Yes, they may know the price that they settled on, but after everything is calculated, they only care about the monthly payments.

I see billboards all the time telling people to buy a house for X amount per month! It’s crazy.

Reply September 28, 2010 at 3:10 am

Easy payments aren’t that transparent as they seem to be.
There are 0 % offers and easy payment offer and even low interest offer but the fact is you need to look at the other charges levied by the Banks. They are often huge enough to consider before you opt for it.


Leave a Comment

{ 11 trackbacks }

Previous post:

Next post: