Money 101  >  Explainers

How do 0% installment plans work?

POSTED ON November 18, 2019

When you’re shopping, you might encounter the phrase “0%-interest installment” or variation of it. This splits up a payment equally over several months instead of making you pay it in full at once.   

It’s kind of like a loan, just without the interest. You get a financial institution like a bank to pay on the spot for the thing you’re buying Then, you pay the institution back, bit by bit, while already enjoying your purchase.  

Is it really 0% interest? 

With 0%-interest installment planyour payments are spread out across the specified number of months at no additional cost. This makes it different from a loan, where you borrow money and pay interest for that service.  

Remember, though, that your credit cards charges can still apply. If you don’t pay off the installments fully on the due datesyou’ll have to deal with a finance charge based on your card’s interest rate.  

Here’s an example: You buy something worth Php 12,000 on a 12-month, 0%-interest installment plan using your credit card. So every month for 12 months, you’ll be billed Php 1,000. Now, let’s say your credit card’s interest rate is 3.5%.   

On Month 1, you’ll be billed Installment 1 (Php 1,000) and the minimum is Php 500. OMonth 2Installment 2 (Php 1,000will be due. 

If you only paid the minimum (Php 500) on Month 1, then on Month 2 you’ll owe PhP 1,000 (Installment 2) plus Php 500 (balance from Month 1) and Php 17.50 (finance charge from Month 1 balance). This adds up to Php 1,517.50.  

In this casethe additional fees and charges end up making the item cost more than the actual price. Of course, if you pay the monthly installments fully and on time, you’ll spend just Php 12,000 in total. 

Should you say yes to a 0%-installment plan? 

0%-interest installment plans are great for managing your expenditure, especially for items that you can’t pay for in one go. Just pay each installment on time and in full to enjoy the benefits.  

Don’t forget, managing your finances prudently and avoiding unnecessary expenses is always the best way to go!