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Financial Literacy
Comparing payment methods
Learn how to compare different payment methods: cash, card, rent-to-own, installment, store financing, and layaway.
When paying for small purchases, like coffee or a haircut, paying cash is almost always the best choice. You do not have to worry about its impact on your budget, or paying any unnecessary fees like interest, processing fees, or minimum charge fees. But, when it comes to bigger purchases, cash may not always be readily available or best. Let's look at some scenarios and compare different payment methods.
Scenario 1: Buying a TV
Let's assume you are thinking about buying a TV. The total cost, after taxes, is dollar sign, 550. You have dollar sign, 200 saved already. Below are the options available to you:
| Method | Terms | Total | Notes |
|---|---|---|---|
| Cash | None | dollar sign, 550 | will have to wait until fully saved up |
| Credit card | 20, point, 99, percent APR, 30 days grace period | dollar sign, 550, plus interest | have to pay off fully in 30 days to avoid interest |
| In-store financing | 6 months interest-free | dollar sign, 550 | 6 payments of dollar sign, 91, point, 67 |
| Layaway | dollar sign, 5 set up fee, equal monthly payments | dollar sign, 555 | will have to wait to take home |
Choosing the best option will depend on a mix of your current financial situation, your discipline, and your own emotions.
If your only concern is paying the lowest cost, then cash and in-store financing are the best choices. Credit card may be a choice here, as well, if you can pay off your balance in 30 days. However, if you want to be able to take the TV home with you immediately, and will not have the entire amount saved up in the next month, then in-store financing becomes the best choice.
Scenario 2: Buying furniture
In this scenario, let's assume you are moving from one-bedroom to a two-bedroom apartment and you need to buy furniture for the second bedroom. The total cost to furnish the bedroom is dollar sign, 725. You have just put down a deposit for the apartment, so you do not have enough cash to buy the furniture outright. On top of that, your credit score is low, since you just started building your credit history.
Let's look at all the payment options and try to decide on the best one.
| Method | Terms | Total | Notes |
|---|---|---|---|
| start cancel, start text, C, a, s, h, end text, end cancel | start cancel, start text, N, o, n, e, end text, end cancel | start cancel, dollar sign, 725, end cancel | no cash saved up |
| Credit card | 29, point, 99, percent APR, 31 days grace period | dollar sign, 725, plus interest | have to pay off fully in 31 days to avoid interest |
| start cancel, start text, I, n, negative, s, t, o, r, e, space, f, i, n, a, n, c, i, n, g, end text, end cancel | start cancel, 9, start text, space, m, o, n, t, h, s, space, i, n, t, e, r, e, s, t, negative, f, r, e, e, end text, end cancel | start cancel, dollar sign, 725, end cancel | not approved |
| Layaway | dollar sign, 5 set up fee, equal monthly payments | dollar sign, 730 | will have to wait to take home |
| Rent-to-own | dollar sign, 70 per month for 12 months | dollar sign, 840 | no credit check, 16, percent interest |
In this scenario, we see that two of the options are not available: cash and in-store financing. Cash is unavailable because there is no cash saved up to fully pay off the furniture. In-store financing is also unavailable since the application for the store credit card was not approved, due to a low credit score. This leaves us with three options: credit card, layaway, and rent-to-own.
If your main goal is to pay the lowest cost, then the best choice would be your credit card, as long as you pay it off before the grace period ends. If you cannot pay off the balance in 31 days, then the second lowest cost would be layaway, as long as you do not need the furniture immediately. This would be the best choice if the second room is a guest room that would not be used immediately.
If you need the furniture immediately and will probably take a year to pay off, then rent-to-own becomes the best choice. Even though the total cost initially appears to be the highest, it is actually lower than the credit card's total cost.
Finding the best payment option depends on many factors, from your finances, budget, timeline, and even emotions. It is always a good idea to write all your options down and eliminate the ones that do not work for your situation.
Want to join the conversation?
The more I learn about this the more curious I'm getting.(10 votes)
So I'm a little confused about how to interpret the correct interest rate information. How many decimal places are we rounding to? Because if we round 0.863 to the second decimal place(6), we get what I believe is an 85% interest rate, if we round to the first decimal place (8), we get a 7% interest rate. I have number dyslexia, so while I understand this concept, I want to make sure I'm sorting the information correctly.(4 votes)
If you round to two decimal places, it should be 86% (0.86) interest, while if you round to one decimal place it should be 90% (0.90). Having said that, you should not be rounding interest rates for an accurate number. If you really have to, round up rather than round down since rounding down may lead you to underestimate the cost. I am not sure what interest rate you are referring to though since I have never seen an interest rate that high.(3 votes)
what does this all mean actually??(5 votes)- Error in explanation about the interest rate of 15.86%(3 votes)
Thank you for solving that! David, just chill a little. Sangil.Jwa solved the problem. Maybe YOU can offer a correction to a help center.(4 votes)
- What is the best possible payment method?(3 votes)
The best possible payment method is to pay on time, don't be late with a payment. BUT, paying the full balance every month does not give you any benefits regarding your credit score, so when you can do it, stretch some things out for a few months (not too many months) to prove that you can pay off a debt.(3 votes)
can i use the envelope method with
my credit card & debit card(3 votes)- Whereas the envelope method was created for use with cash, I suppose you could make it work with a credit card. Just use Monopoly money in the envelopes, and deduct from the monthly amount you allow yourself to charge onto the card. But, why you'd want to do this is a mystery to me.(3 votes)
- no tengo preguntas(3 votes)
- what I mean is this does not make any sense to me at all and I am so very confused(2 votes)
- Hi!
You aren't very clear on what EXACTLY you are confused on. If it has to do with this lesson, this is trying to educate you on what payment methods would be best for your financial situations.
As for this entire unit, it's showing you payment methods and showing you what you might want to use for your personal life.
Hope this helps!(2 votes)
