Pre-paying for Products & Services: Pros, Cons & Risks

One of the growing trends right now is pre-paying for products and services. From pre-payment plans for cruises, to pre-payment for dental service, to a deposit for a car purchase, there are any number companies claiming that you can make services and purchases more afford when you pre-pay — at least a little. (In the case of a deposit, of course, you are reserving a product that you want, rather than making it more affordable.)

Should You Pre-Pay?

In some cases, you know you are going to have to pay up front. Whenever you buy a product at the store, or online, you have to pay before you can start using it. However, there are some things, like cruises, that you can sign up for ahead of time, and make payments. Pre-paid cruises and other vacation packages allow you to schedule out six to 12 months in advance, and then make regular payments. By the time your fabulous vacation rolls around, it’s all paid for. Breaking down into these regular pre-payments can make it seem more affordable.

There are also other pre-payment programs. The rising cost of health care is creating a perfect opportunity for service provides to tout affordable health care through pre-payment. You can get pre-paid dental services, eye care services and even pre-paid prescription services. If you are worried that you might need a lawyer at some point, you can even sign up for pre-paid legal services. Pay now, and later you will have what you need. At least, that’s the sales pitch.

The downside to pre-paying. You need to be wary of such “deals.” It’s one thing to pay a freelancer half up front, or to pay a home improvement contractor a small portion of the amount for services, and quite another to pre-pay for services you aren’t even sure you are going to need down the road. Instead of pre-paying for legal services or for dental services, it might be a better idea to build up an emergency fund to cover these expenses, should they arise.

It’s also important to be careful of how you pay for things like vacations. What happens if the cruise is cancelled, or the company goes bankrupt? What if you’ve been making payments to swindler who hasn’t been applying your payments to your vacation at all? If you do decide to sign up for a pre-payment plan, check with the Better Business Bureau for complaints, and do some research to make sure that you can get your money back if something outside your control changes things.

When You Can Expect to Pre-Pay

In some cases, you are expected to pre-pay. If you are making a special order, or buying a car, it is common to be required to make a deposit. In such cases, you need to consider the situation, and find out the terms. Is the deposit refundable? Will the deposit go toward the cost of your purchase if you decide to buy? It’s vital that you know the answers to these questions. You can also put the deposit on your credit card. This way, you will at least be able to dispute the charge through your credit card issuer if the need arises.

Alternatives to Pre-paying

If you aren’t required to prepay for products or services, then take a few moments to run the numbers and determine if pre-paying is actually a better deal, or just a sales pitch that makes it seem like a better deal. If there is long term no financial benefit of pre-paying, then consider setting up a sinking fund or personal accrual account and setting aside a predetermined amount of money each month (many banks make this easy to do by allowing customers to open sub-accounts). That way the major purchase seems more affordable and you have the built in flexibility of using your money for something else if the need arises – without having to worry about jumping through hoops or paying any cancellation fees.

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