Installment buying is when you pay for a portion of your purchase immediately and have the remaining balance owing divided into equal payments.

Installment buying is usually more expensive than just buying the item outright. The company needs to make some extra money to cover administration fees and interest lost on their money.

Example

Bracks Fine Furniture sells a fridge for $900 plus taxes if you pay now. If you wish, you can buy the fridge on instalments for $300 down and $135 a month for 6 months (this plan already includes taxes). What is the difference in cost between the normal price and the instalment price?

Solution

If you purchase the fridge now, it will cost you the purchase price plus taxes:

$900 x 0.07 = $63.00 PST
$900 x 0.07 = $63.00 GST

$900 + $63 + $63 = $1026.00

It costs $1026.00 for the fridge if purchased with money up front. If it is purchased with instalments it would cost:

$300 for the down payment
$135 x 6 for the six months of payments = $810

$300 + $810 = $1110.00

The difference in cost is $84. You would pay $84 more to buy in instalments.