Should you borrow money to buy a new mobile phone?

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I was looking for a new phone after my old one died on me.

I was at the mall looking at the window display of electronic shops.  The minute I approached a shop, sales reps would circle around me and offer their most expensive model. They wouldn’t let me talk as they mumble away a list of unbelievable features that I don’t yet understand.

Of course, I said no.

But they wouldn’t take no for an answer. They offered me to open a personal loan so I could bring home the device that day. I just needed to present a valid ID, pay 30% of the price, and borrow money for the rest.

That’s sounded too good to be true. So I asked for a quote, and back at home I did the math.

The phone

Let’s start with the price tag of the phone: P11,990 pesos.

Right there and then, you have to pay roughly 30% of its value, which they said was P3,000 pesos, as down-payment.

I would then have to take on debt and borrow money, which is P8,990 pesos.

Amount
Price 11,990
Down-payment 3,000
 Amount to borrow 8,990

The payment arrangements

There were three payment arrangements offered.

I can pay in 9 months, 12 months and 18 months. Each has different monthly amount that I needed to pay back. So I made a table of each arrangement, the monthly amount and the total sum of money.

Months Payment Total amount
9 1,483 13,347
12 1,236  14,832
18 937  16,866

Interest

I then checked how much the interest is. This is an important piece of information, so I can know how much more I am actually paying.

Months Amount to borrow Total payment Interest Paid to lender
9 8,990 13,347  48.46% 4,357
12 8,990 14,832 64.98% 5,842
18 8,990 16,866 87.61% 7,876

Conclusion

As you can see, I am going to pay at least 48% to 88% interest for borrowing P8,990 pesos! After I have completed the repayments in 9 to 18 months, the phone would have already depreciated considerably. And I doubt that I’m going to be able to sell it at the original price, or even at the new price computed below.

Original Price Months New Price Difference
11,990 9 16,347 4,357
11,990 12 17,832 5,842
11,990 18 19,866 7,876

With all things considered, I can personally say that I would rather pay in cash rather than take a personal loan. If I don’t have the money, I will not borrow money to buy the phone right away. I might have to either buy a more affordable model or wait until I save enough to afford it.

Is borrowing money to buy a phone not good?

Not at all times. There are good debts, and there are bad debts. And that’s why you have to know why you need a phone in the first place.

There are instances when it makes sense to buy a phone through borrowing when:

  • The phone is going to be used for business. By using it to generate income, you can reach breakeven between the interest you’re paying and the income that you gain.
  • The price tag of the phone is discounted and its original value matches the interest. In short, the phone is being sold for discounted price of P11,990 pesos but its original price is P20,000. But then again, if it were on a discount why pay the original price?
  • Your entire existence means nothing if you can’t buy the phone right away. You will suffer a debilitating stroke if you can’t get hold of the phone immediately. Well in that case, the intrinsic value (the value that the device means to you) is more than its monetary value. Ikaw na, besh.

Why not pay in cash and invest the difference?

Think of the things that you can buy with P4,357 pesos, P5,482 pesos or P7,876 pesos. Better yet, instead of spending the money, you invested it for your financial plan.

Imagine that you invested the amounts above and forget about them in 20 years. That is, you put down the money in a savings product or investment managed fund and leave it there for two decades. I did the math again, and here are the future values.

Savings in 20 years

Product 4,357 5,482 7,876
Savings account (0.25%) 4,769 5,763 8,279
Time deposit (1%) 5,536 6,689 9,610
Investment managed fund (10%) 30,523 36,880 52,986