Pay in a lump sum, or in installments?

Lump sum, or installments?If you have the option of paying for something in full, or paying for it in installments, which method do you choose?  A number of factors play into making a wise decision.

It’s good advice to consider expensive purchases carefully before buying.  And the more expensive the purchase, the more consideration you should give.  A good rule of thumb is to wait one day for each $100 that the item costs.

Often we’re presented with payment options for a large purchase. These may include a one-time payment option, or periodic options like annual, quarterly, or monthly payments.

We recently had two big expenses to consider. Each one was between one and two thousand dollars. And each one had its own set of multiple payment options.

Pay in full vs. pay interest-free in installments

The first was an operation for our six-year-old dog who tore out a ligament and couldn’t walk.

The options available for payment of the operation were to pay the entire amount up front, or to use a health care credit card offered by the vet to pay over time with no interest.

This is actually three options, because if we use a credit card to pay up front, we can choose either to pay the next bill in full, or to stretch it out over time.

We didn’t really consider carrying a balance on our credit card to be a viable option, because that’s not a road we want to go down if we don’t have to.

And though the health care credit card did get our attention, reviewing the terms and conditions was enough to show us that it was risky to do this. (There were too many ways to screw up, and this was possibly by design.)

So for this one we decided to pay up front.

Pay monthly vs. pay for a full year with a discount

The second big expense was the fee for our daughter’s swim team.

We could pay for this monthly, or pay for the entire year at once, with a discount. The one-time payment would have been about $75 less than the sum of the monthly payments.

If we hadn’t had the dog operation on top of this one, we would have paid the entire amount for the swim team up front, because the discount was significant.

But we made the determination that we couldn’t pay for both of these up front without strapping us in other areas. Paying this fee by the month, though more expensive, was less of a risk.

So, despite the discount, we’re paying for our daughter’s swim team fee by the month.

Things to consider

I’ll call out some of the questions that we asked when making these decisions:

  1. Is there a discount for paying up front? If so, how much?

It should be the case that paying up front is at least no more expensive than paying in installments. (There’s rarely a reason to pay more if you’re paying up front!)

But if there’s no discount for paying up front, it becomes a tougher sell.  The reason is that the money can be invested before it’s paid, but not after.

It doesn’t take a huge up-front discount to make it worthwhile to pay up front (all other things being equal).  Savings accounts pay zero-point-diddly right now.  Even a 5% discount is pretty good!

  1. What could happen if there’s a lapse in payment?

The repercussions of this worried us enough that we paid in full for our dog’s operations, even though we had the option of paying over time (up to 18 months) interest-free.  Missing a payment could have cost us hundreds of dollars in retroactive interest, not to mention the ding on our credit reports.

If we missed a swim team payment?  Not so much financially, but our daughter sure wouldn’t be pleased with us.

  1. What about the broader context? Will it strap you?

If it made sense to pay both of these expenses in full, why didn’t we?

Good deals always are taken in context.  Since we have the bigger picture of our finances, we stepped back from paying both of them in full in light of some uncertainty in our financial picture.  What could be a good deal one month could be foolhardy the next month.

If you’ve made a careful decision to buy something, make an equally careful decision how you pay for it.

Is a health care sharing ministry a good deal?

There was a good question asked over at the Money StackExchange site dealing with an alternative to conventional health insurance called a health care sharing ministry.

The cogent parts of the question are below:

… The basic idea of a health share is that it is a non-profit organization where members pledge to pay a certain amount of one another’s medical expenses. Technically, it is not insurance, but it sounds similar to insurance.

I would like to know more about what the difference is between a health share and health insurance, as well as the risks and benefits of using one versus the other …

The question mentions an organization called Liberty℠ HealthShare, so I visited the site to learn more about it.

Is a health care sharing ministry a good deal?

Checking the box on your taxes

First and foremost, a health care sharing ministry, if it meets certain criteria, is one of the nine ways to claim exemption from minimum essential coverage under the Affordable Care Act.  These criteria are:

  • The organization must be tax-exempt under 501(c)(3).
  • Members must share common religious or ethical beliefs.
  • The organization must have been continuously in existence since the end of 1999.
  • Annual audits of the financial books (by a CPA) must be publicly available upon request.
  • The organization cannot discriminate by state of residence or employment.
  • Members cannot be kicked out if they develop a medical condition.

This exemption is the interesting part for most people: satisfy the ACA requirement as cheaply as possible.  For Liberty, $449/month is the upper tier for a family, and that 100% cost sharing (note, not “coverage”, since this is not insurance) of up to $1 million per incident.  The amount is even less for younger families.

That’s the carrot.  Where’s the stick?

There are drawbacks, of course.  Not all expenses are eligible for sharing, but that’s also true of traditional health insurance.  These are drawbacks specific to health care sharing ministries:

  • Since this isn’t insurance, you become a “self-pay” patient.  No preferred-provider networks, no pre-negotiated rates.  You get treated as if you don’t have insurance, which … you don’t.  That can also be translated as “full price.”  If there are discounts to be had, or payment plans to be arranged, you’ll need to pull out your negotiating skills.
  • You gotta have faith.  These groups aren’t for everyone — on purpose.  These sharing organizations would fall apart without a common basis of faith.  If you don’t share the faith of the group, then you don’t share your medical expenses with the group.
  • You have to keep it clean.  The premise of Liberty is that the body is the temple of the Holy Spirit.  As such, the temple can’t have cigarette butts, lots of liquor bottles, or any illegal drugs strewn in it.  In addition, a healthy lifestyle (or movement toward one) is required through regular exercise, good eating habits, etc.
  • Preventive care costs aren’t shared.  Dovetailing on the point above, preventive care is something you should be doing anyway as part of a healthy lifestyle, so it’s not eligible for sharing.
  • Small expenses aren’t shared.  Liberty has an “annual unshared amount” which serves the same purpose as a deductible.  But beyond this, if the amount of any incident is less than this amount, it’s not shared.

Considerations for whether to apply

What should be considered when thinking about applying for a health care sharing ministry?  Try these questions on for size:

  • Do you share the beliefs of the ministries?  This can be a deal-killer even if you’re healthy and otherwise qualified.  There are only a handful of organizations that qualify for the ACA exemption, so this can be a real issue.
  • Do you have a huge family?  The family plan doesn’t seem to say anything about family size.  It’s a bit like a family discount if you have a large family.
  • Are you healthy?  Health improves your application if you’re healthy, and kills it if you’re not.  They keep costs low by accepting people less likely to incur major medical expenses.
  • Can you get affordable traditional insurance elsewhere?  If so, there may not be a need for this kind of sharing arrangement (though it can be a secondary reimbursement mechanism).
  • Do you have ample cash?  The monthly sharing contribution is on the whole lower than for insurance, but out-of-pocket expenses could be full price, and immediate.  Just like health (or auto) insurance with a high deductible, you should expect to pay more at the time service is rendered than someone who only has a copay.
  • Can you take advantage of the sharing for what you expect you’ll need?  Read the fine print.  Pre-existing conditions can be an issue, though Liberty, for example, does “phase them out” completely after three years, and offers partial sharing in the first and second years.
  • Do you support the mission of the ministries?  This is separate than qualifying for sharing in one based on faith.  You still have to sleep at night.

Any experience with health care sharing ministries?  I’m not a member of one, so I’d love to hear about them!

Seven-point checklist for healthcare credit cards

Pets are expensive.  Not as expensive as children, but still expensive.  Costs can vary widely, but a cost of five figures over the 12- to 14-year lifetime of a dog is easy to hit.

One of our dogs had a leg injury recently that will set us back a bit.  When we asked our vet about payment plans, she gave us a brochure for a healthcare credit card.

On the face of it, the healthcare credit card offers interest-free payment of qualified expenses over time.  The card our vet offered allowed repayment over six, 12, or 18 months.

Why the vet offered the card brochure

But what’s the catch?  You know the drill:  If something sounds too good to be true, it probably is.

The vet wasn’t just being nice and giving us free float on a nearly-$2,000 surgery.  She offered us a credit product that has the following upsides for her:

  • She gets paid quickly.  There’s a processing fee (like with any credit card transaction) but she’ll get her money from the card provider promptly.
  • It’s no cost to her if we don’t use it.  So no skin off her nose if we decline.
  • It reduces the barrier for us saying “yes” to the surgery.  Spreading out the payments at no cost is very appealing, and it works well for just about any business that sells expensive items.
  • She still gets paid even if we lapse on the payments.  The card issuer now has the risk of getting paid back.

Who gets stuck with the downside, though?  The card issuer has some downside, as they stand the risk of receiving no interest, but they did get a processing fee up front.

That leaves the person using the card with the rest of the downside — either in the form of (expensive) interest, or a tarnished credit record.

But you’d be unlikely to pick that up, or the other gotchas, just from the brochure.  That’s what the checklist below is for.

Checklist for evaluating healthcare credit cards

Evaluate healthcare credit cards with this checklist

The marketing brochure had a website listed, so I visited the site.  The following is a checklist for evaluating whether or not using a healthcare credit card is worth it.

  1. Is your vet / dentist / doctor part of the network?  Since our vet offered the brochure, it was clear she was in-network, but if you’re looking for a local practitioner who offers interest-free payment plans, then you’ll want to know which ones do, and for how long.
  2. What are the terms and conditions of the card?  CareCredit™, the card that our vet offers, had a link to its terms and conditions.  For financial terms and conditions, this one read pretty easily, so I give them … um … credit for that.
  3. How dated are the terms and conditions?  One might expect that a credit provider that promotes “online access & payments” would have their terms and conditions up to date.  The ones
  4. What is the annual percentage rate if you don’t follow the rules as in, if you’re late with a payment, miss a payment, or don’t pay back the full amount within the promotional period?  For the card we were offered, the rate was 26.99%, which in personal finance parlance is “really dang high.”
  5. How do they calculate the interest charge?  In the case of the card offered to us, the method was the daily balance method, calculated from the time of purchase.  To see the effect of this, let’s say that we incurred a vet bill was $1,800, and were paying this off $100 a month for 18 months.  Something happens so that the 17th payment is late.  What was a $200 balance before the missed payment more than triples; halfway through month 17 the balance is now about $672.  Just like that.  Talk about adding insult to injury (or our dog’s injury, as the case may be).
  6. How does the credit provider use your personal information?  I was a bit surprised how candid the terms and conditions were in this regard, especially considering how many ways they shared my information.  I could expect a lot of “fan mail” from CareCredit’s business relations, affiliates and non-affiliates alike.
  7. Does the card provider force resolution by arbitration in place of the courts?  In this case, yes, unless I opted out — in writing, by mail.  (Other communication from my end could only be done through mail as well.  From their end, however, email was considered “in writing” and it would have been my responsibility to ensure that I received their emails, rescued things from my spam folder, etc.)

Know your tendencies and reach your own conclusions

After looking carefully at the terms and conditions, I’m not at all keen on signing up for this card.  If everything goes well, sure, we could pay over time, interest free.  But there are a lot of ways we could screw up and end up paying a lot of money, and end up with a mark on our credit.

Maybe she’ll accept a cash discount.  Otherwise we’ll use our rewards credit card and the rebate will be enough for a couple of pizzas.

But signing up for this card will risk putting us in the financial doghouse.