Are payment plans really as convenient as everyone says?

A 27-year-old woman asks:

Usually, I need to clear my throat and add a few disclaimers before answering such questions. Money is personal, and the right answer often depends on each person’s situation, priorities and preferences.

So it is a pleasant change when the answer can be clear.

It is healthy to be sceptical

The way you ask the question suggests a healthy level of doubt about payment plans. When everyone around you is talking about taking advantage of them , a small financial-literacy elf seems to whisper in your ear: “Can that really be right?”

I would consider that good news, as it can hard to resist peer pressure, especially when "everyone's doing it".

Expensive loans

You ask whether these are “just loans”, and you are exactly right. When you use a payment plan, you are choosing to buy something now and pay for it later. The cost may be more or less visible when the loan is taken, but you should always be able to find a figure called the annual percentage rate, or APR (ÁHK in Icelandic). It shows the total cost of the borrowing, in this case the payment plan, on an annual basis.

An example

Let’s take the example of buying an iPhone 17 Pro from an Icelandic online store. If it is paid for immediately, it costs ISK 210,000. If your friends use payment plans, however, all kinds of extra costs appear. They could, for example, spread the payment over 18 months and then they would only need to pay ISK 14,776 a month.

Your friends call that convenient and cheap. But you know this is a terrible idea. In this example, the buyer pays 16.5% interest, an ISK 11,549 borrowing fee and ISK 789 a month just for the privilege of making loan payments. The APR is 38.33%, and that is far from the highest cost these payment plans can carry. They can also be cheaper, of course. Instead of the phone costing your friends ISK 210,000, they find it more convenient and cheaper to pay ISK 254,000 for it.

You know as well as I do where this ends. This is often about allowing ourselves something there is no real room for in the household budget. Instead of saying no, we go into debt. That behaviour becomes a growing burden on people’s finances. It reduces security, makes it harder to build wealth, limits the ability to pay down other debts and weakens the household’s long-term financial position. This is one of the basic things we need to understand if we hope to be reasonably financially literate.

Financial literacy 101

If a book about financial literacy consisted only of a cover and a few words, it might say something like this:

Chapter 1: How to greatly improve your chances of a strong financial future

Do not take out consumer loans. You will probably need help buying a home. That is understandable. But apart from that, do not buy things you cannot afford.

What if consumer debt is necessary?

In emergencies, payment plans for consumption may sometimes be necessary. For example, if someone cannot buy essential medicine or food, and there is no emergency fund available, borrowing may be needed to get through the situation. But if that happens, it is important to use the least expensive option available and make a clear plan to repay the loan quickly and safely.

All consumer loans are expensive. Over a very short period, credit card debt or an overdraft may sometimes be less bad than loans that include fees on top of interest. Speak with your bank and look at other options before accepting the financing that is offered to you at the point of purchase.

How do we do better?

Please do not simply do as your friends do. I'm not saying they are dumb. They have simply misunderstood one of the fundamentals of personal finance, and that misunderstanding is very common. Be a good friend and encourage them to start paying down their consumer loans in a structured way and to organise their finances so they never need to use payment plans again. To do that, they need breathing room in the household budget, and that may require some cleaning up.

The mood in this group of friends needs to change

Perhaps you can help start that change. As I said at the beginning, it is a good sign that you are asking this question and doubting the poor money habits around you. It means you already have the kind of healthy basic attitude needed to build and maintain strong personal finances over time.