I was recently signing up for a new program with one of my long term service providers. This Extended Payment Plan or Self Finance?person changed their offerings, pricing, and packaging so I had to do some reviewing and deciding. I knew for certain I wanted her service and I knew what package was right for me. I just needed to figure out how to pay for it. That brought me to the question: Do I take her extended payment arrangement or should I self-finance by putting it on my credit card?

It seems like an easy question, but it is not always easy to answer. Why? So often we don’t take the time to actually do the math and realistically determine what the best option is. And, we sometimes don’t have the discipline to follow through on consistently paying down the balance left to our own devices whereas on a monthly plan we are forced to pay what is due.

Here’s how you can make this determination fairly quickly for any big purchase you have looming. At least it worked for me. Let’s take a hypothetical example (with easy math). Assume you have a purchase to make that is a 6 month commitment to a program. The total cost if you pay in full up front is $2,000. If you were to spread it out for monthly payment over 6 months would be a charge of $450/month.

Step 1:

Do some very quick math to determine if this is even worth spending time on. Multiply the monthly fee times the length of time and subtract it from the one time payment to determine the “convenience charge” for the extended payment plan. In this case:

$450 X 6 = $2700

$2700-$2000 = $700

Now, that is a fairly hefty fee for convenience, yet if it is the only way you can afford something you need or want, it may be worth it. But, don’t jump too fast. Take it a step further.

Step 2:

Determine how much interest you would pay over 6 months if you put it on your credit card. Now, this calculation only works if you are not already carrying a balance on that card (otherwise you may end up paying more in the end unless you can increase your current monthly payment to the credit card accordingly). So, let’s assume your card is paying 12%.

$2000 % .12 / 12 = $20 interest

That would mean all things being equal you’d have $20 of interest in month one of your balance. Now even if you carried this balance for 6 months without paying a dime considering compounding interest, you would owe approximately $2102.02 in month 6 to pay it off in full. So if you compare $102 to $700 it is a no-brainer to self-finance this purchase.

Step 3:

This is the buyer beware part. It is only a no-brainer if you create a payment plan and stick to it! Otherwise, if you let the balance ride and ride (or if you already have an existing balance) it may end up costing you even more than the $700 “convenience fee”.

So, for me, I know I can make the purchase and pay it off within the 6 month time-frame or less. That’s the choice I made. How about you? What would you choose? Have you ever chosen to self-finance and then blown it? Are there instances where an extended plan simply works better for you even if it is costlier? Share in the comments…

Paula Gregorowicz is the Comfortable in Your Own Skin(tm) Coach and author of the 12 part eCourse on How to Be Comfortable in Your Own Skin. Download it for FREE at www.thepaulagcompany.com and her blog www.coaching4lesbians.com .