“It’s only $195 a week.”
That sentence, or similar, has helped sell a lot of cars, phones, holidays, furniture and lifestyle purchases.
Breaking a large purchase into a smaller weekly or monthly repayment can make almost anything feel more affordable. Instead of asking, “Is this worth $40,000?” we start asking, “Can we fit $195 a week into the budget?”
They are not the same question.
Being able to make the repayment does not necessarily mean you can (or should) afford the purchase.
Repayments Can Hide The Real Cost
When we focus only on the repayment, the total cost can become almost invisible.
A car becomes a weekly payment. A new phone becomes a monthly plan. A holiday becomes something we can pay off over time. Buy Now, Pay Later can make a purchase feel smaller again because the amount is divided into several instalments.
The repayment might fit within your current cash flow, but that does not automatically make a smart call.
The real cost includes the purchase price, interest, fees and how long you are locked into the repayment.
There is also another cost that can be easy to overlook. Every new repayment is a claim on your future income.
When you sign up today, you are deciding where part of next month’s pay, next year’s pay and sometimes several years of future income will go. One commitment might not create a problem. But the pressure can build when commitments begin stacking on top of each other.
The mortgage, car finance, credit card, phone plan, personal loan, subscriptions and Buy-Now-Pay-Later accounts can combine to leave very little financial breathing room.
What Else Could That Money Be Doing?
Before taking on another repayment, it is worth asking what that money will no longer be available for.
An extra $200 a fortnight might instead help you build an emergency fund, eliminate another debt, reduce your mortgage, contribute to Super, invest for the future or help fund one of your Most Important Goals.
This does not mean every financed purchase is a bad decision. It simply means affordability should be considered in the context of your whole financial position.
Ask yourself, “What am I giving up by saying yes to this payment?”
A Better Test Of Affordability
Before committing to another repayment, try stepping back from the weekly figure. Look instead at the total amount you will pay, including interest and fees.
Ask yourself whether you would still make the purchase now you understand the full cost rather than the repayment.
Repayments can be useful tools, but they can also make expensive purchases appear cheaper than they really are.
