Guide

To avoid overpaying unnecessarily: choosing between credit, installment plan, and leasing

Author: Olga Lenskaya. Photo: Onlíner archive

You've been approved for an installment plan, credit, or leasing? That's good news. Now, check if you won't be overpaying for your new phone or car. Often, behind the sweet promises of creditors, bitter interest rates are hidden. Together with financial consultant Elena Maximovich, we'll break down the numbers to see how "free" installment plans make goods more expensive, and why spending just a couple of hours studying the offers of creditors can help you save thousands of rubles.

What we'll discuss

"Honest installment plan" and "disguised credit"

Not all credits are the same: what sets apart repayment programs

What's more beneficial: calculating using the example of 100,000 rubles

The main thing is not to pay according to the schedule, but to pay more

Leasing: what it is and who benefits from it

Why a bank's limit is not your limit

This article was previously published on Onlíner. We've updated it to share relevant legal information again, including explanations of laws, useful instructions, and recommendations. Such materials don't lose their importance and can help you better understand your rights and obligations.

Elena Maximovich

A certified international financial advisor with over 20 years of experience in financial planning and long-term investments. An accredited member of the SRO NASFP, a specialist in creating personalized strategies for achieving financial independence and protecting assets.

"There's no one-size-fits-all approach to financing large purchases," Elena begins the conversation with an important caveat. "You can't just tell someone that the best option for acquiring any property is, for example, an installment plan. Or that credit is simple: you come, take the money, and buy what you want. Or that leasing is complicated but very beneficial. No. It only makes sense to talk about a financial instrument that suits your specific situation and goal."

According to the expert, borrowing should be approached with caution and preparation, which means studying, calculating, and considering the context. Here's what the expert advises to pay attention to:

The goal for which you're using borrowed resources. It's clear that you're unlikely to lease an iPhone: it doesn't make sense. But a car, especially if you're an individual entrepreneur, is worth financing in this way.

Your financial situation. If you want to purchase something on credit or lease, but, for example, you do not have an official income in Belarus, then you will have to consider other financial instruments, such as saving (incidentally, this method is considered by the expert to be the most reasonable and beneficial).

The conditions offered by the market for the financial instrument you have chosen. Do not be lazy and call several creditors that at first glance offer the same conditions: surely one of the offers will be more beneficial for you.

Debt burden. Based on the numbers you have collected, assess and, if possible, optimize your debt burden. We will return to how to do this later.

Remember that borrowed funds are never given for free. You always pay for such a service, the question is only how much exactly and how to pay less, emphasizes Elena.

"Fair installment plan" and "disguised credit"

We are used to thinking that an installment plan is always beneficial and convenient. To apply, you only need a passport: you come to the store, choose a refrigerator, give your passport, apply, make the first payment, and leave with the purchase.

And indeed, why take out the entire amount at once if you can stretch the pleasure over several years - pay everything later and almost imperceptibly for the budget?

Of course, at first glance, this seems very beneficial, agrees the expert. But often, behind the attractive opportunity to buy now and pay later, there are conditions that make the installment plan ultimately more expensive than a regular bank loan.

How can this be?

There are two types of installment plans, notes Elena. The first is interest-free, or so-called fair, installment plan, when all accompanying expenses are sponsored by either the seller or the bank. This is, without a doubt, the most beneficial option for the buyer. The bank has its own interests here, and the store finances you exclusively to stimulate its sales.

The expert notes that the "free" nature of such an installment plan is often just an illusion. The payment for it can be hidden in other forms, for example:

An increased price of the goods, when the interest and commissions of the partner bank may already be included in the initial cost.

Hidden insurance and commissions that significantly increase the final amount.

Excessive penalties for late payment, which can be higher than similar penalties for a loan.

The second option for installment payments is installment payments with interest. Here, one should not deceive oneself: this is the same loan, just called differently.

The main legal distinction between installment payments and a loan is the absence of interest on the use of money.

By law, if a contract specifies any interest rate, it is already considered a loan.

When formalizing installment payments, what should one always pay attention to?

Always recalculate the final amount. Compare what the purchase will ultimately cost you. Be prepared to explore alternatives. If a product is sold in installments, it's worth looking for it in other stores without similar financing offers. You will likely see a price difference that will interest you.

The financier also advises reading the contract carefully and paying attention to these details:

Penalties for late payment: for installment payments, they can be significantly higher than penalties for loans in the same circumstances.

Product return conditions: if a product purchased in installments turns out to be defective, the process of returning or exchanging it may become complicated and prolonged.

Early repayment conditions: in some installment contracts, there may be a ban on early repayment; this condition is not common, but it exists, so you need to look for it in the document.

A loan is a loan, but they differ: what distinguishes repayment programs

So, a loan is a monetary loan that a bank or other credit organization provides to you with interest. The key characteristic of a loan is its payability: you not only return the borrowed money (the loan body) but also pay interest for using it.

It is the interest that serves as the bank's payment for risk and income.

Within a loan, there are different payment models: annuity and differentiated, notes the financial consultant. Therefore, when choosing this financial instrument, it is essential to pay attention not only to the interest rate but also to the type of payment, as it directly affects the amount of overpayment and the repayment schedule.

Many borrowers are unaware of the existence of different calculation systems and often choose a repayment program based on the example of friends or relatives, which can turn out to be a wrong decision. The situation is complicated by the fact that in some types of lending, such as consumer loans, the client often has no choice. Almost all banks offer them with an annuity payment system, since this scheme is more beneficial for the bank itself, as it allows it to earn more.

However, in other cases, such as when taking out a mortgage for the construction or purchase of housing, the borrower is often given the opportunity to choose between an annuity and a differentiated payment.

The difference between them is that:

with an annuity payment, you pay the same amount throughout the entire loan period;

with a differentiated payment, the first payments will be the largest, and this is the main difficulty for the borrower at the start; however, with each month, the payment amount will gradually decrease, and it will be easier to pay.

To avoid high financial pressure at the beginning of the period, most borrowers tend to choose an annuity system, notes an expert. In this case, the first payment is significantly less than with a differentiated approach.

But let's turn to real numbers.

What is more beneficial: let's calculate using the example of 100,000 rubles

To clearly show the difference, let's consider the calculation using a specific example: a loan of 100,000 rubles for a period of five years (60 months) at 15% per annum.

Annuity payment: the same payments every month. The formula for calculating payments looks like this:

Annuity payment = C × K,

where:

C is the loan amount (100,000 rubles);

K is the annuity coefficient; calculated using a formula that takes into account the term and interest, - its essence is to distribute the total overpayment evenly throughout the loan period.

The result for the borrower:

Monthly payment: 2,379 rubles (unchanged throughout the five years).

Total overpayment: 42,739 rubles.

This is convenient for budgeting, as you know the exact amount to pay each month.

Differentiated payment: more now, less later. Here, the formula is different:

Differentiated payment = OD + (CK × PS / 100 × N / K),

where:

OD is the part of the principal debt (in our example, 100,000 rubles / 60 months = 1,666 rubles);

CK is the remaining principal debt;

PS is the annual interest rate (15%); N is the number of days in the billing month; K is the number of days in a year (365 or 366).

How it works in practice: the loan body (OD) is paid in equal parts every month, and interest is accrued on the remaining debt. Therefore, at the beginning of the term, payments are the largest, and by the end, they decrease significantly.

Calculation for the first month: Main debt (OD): 1666 rubles. Interest: (100,000 rubles × 15% / 100%) = 15,000 rubles per year. To find out the amount for a specific month (for example, 30 days in a year with 366 days), the calculation is as follows: (15,000 rubles × 30 days / 366 days) ≈ 1220 rubles. Total first payment: 1666 rubles + 1220 rubles = 2895 rubles.

In the next month, the remaining debt will be not 100,000 rubles, but 98,334 rubles. Interest will be accrued on this smaller amount, and the total payment will be slightly lower. With each month, the share of interest will decrease.

Results for the differentiated payment for the entire term: First payment: 2895 rubles. Last payments: slightly more than 1666 rubles. Total overpayment: 38,125 rubles.

For our example, the difference is obvious:

Credit payment parameter

Annuity Differentiated

First payment 2379 rubles 2895 rubles

Overpayment 42,739 rubles 38,125 rubles

The numbers speak for themselves: the savings are 4614 rubles. But what should a person choose in their situation?

An annuity payment is suitable if predictability and low financial burden at the start are critical for you. You pay the same amount, which simplifies budget planning, comments a financial analyst. A differentiated payment is more beneficial in terms of total overpayment. But do not forget that the first payments will be significantly higher.

So, we come to the conclusion that the decision depends on a person's financial capabilities in each specific case.

If you are confident in your stable income and can afford higher payments at the beginning, a differentiated payment will help you save. If, for you, the priority is a uniform burden, your choice is an annuity, concludes Elena.

The main thing is to pay not according to the schedule, but to pay more

How beneficial can it be to pay off a loan ahead of schedule?

I will provide a simple calculation that surprises everyone: early loan repayment is indeed beneficial, but not everyone understands how beneficial it is. For clarity, let's take the same loan that was mentioned earlier:

The amount is 100,000 rubles.

The term is 5 years (60 months).

The interest rate is 15% per annum.

The annuity payment is 2,379 rubles per month.

The total overpayment is 42,739 rubles.

Now, let's assume that the borrower has the financial ability to pay not 2,379 rubles, but 500 rubles more, i.e., 2,879 rubles per month.

What happens in this scenario?

The loan term is significantly reduced. By paying an additional 500 rubles every time for the first six months, the borrower can reduce the total loan term by six months. Instead of five years, they will pay off the loan in four and a half years.

The overpayment is significantly reduced because these additional 500 rubles will go directly towards paying off the principal debt.

As a result, the borrower saves on interest almost the same amount that they pay extra. Over six months, the borrower pays an additional 500 rubles, which is a total of 3,000 rubles. These 3,000 rubles, directed towards early repayment of the loan body, allow the borrower to save approximately 3,000 rubles on interest for the entire remaining term.

A screenshot of the calculations by financial analyst Elena Maximovich

So, by paying an extra 500 rubles per month, you not only get rid of the debt faster, but also effectively double the efficiency of this money: it works towards paying off the debt, reducing overpayment, and shortening the term.

Leasing: what it is and who it benefits

Leasing is one of the most complex financial instruments, which is often confused with a loan, notes the expert. In fact, it is a form of long-term property rental with the right to subsequent purchase. Most often, leasing is used for expensive assets: equipment, technology, real estate, or cars.

Leasing for individuals is the same as rental with the right to purchase. For an ordinary person, this is primarily a way to get a car.

Simplified, the leasing mechanism looks like this:

The lessor is the owner of the property (often a bank or a specialized company).

The lessee is an individual who takes the property for rent.

The seller is the company from which the lessor purchases the property; sometimes the lessor and the seller are the same entity (for example, a car manufacturer).

The distinctive feature of leasing is that you do not become the owner of the vehicle immediately - you are its tenant and pay leasing payments (rent). At the end of the contract term, you can purchase the vehicle from the lessor for a symbolic residual value, since its main price has already been paid during the leasing period.

For legal entities and individual entrepreneurs, leasing is a powerful tool for tax optimization, as leasing payments are accounted for in the expense section of the legal entity.

This is why businesses often prefer leasing to a regular loan: it helps to manage cash flows more efficiently and reduce the fiscal burden.

• When choosing leasing, it is important