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.
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 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.
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|
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|
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. The intrinsic value (the value that the device means to you) is more than its monetary value.
Why not pay in cash and invest the difference?
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
|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|