Ignoring Discounts Is the Most Expensive Money You Can Borrow

Home » Blog » Ignoring Discounts Is the Most Expensive Money You Can Borrow

Offer-706847When you don't take advantage of early payment discounts, you are basically borrowing money at the highest annual interest you will probably ever pay.

Suppose that your local supply store will give you a 2 percent discount for paying cash now.  The alternative is to pay the full amount due in a month.  A 2 percent monthly interest charge works out to a 24 percent annual interest charge.  You would be much better off arranging a line of credit with your local bank.  Interest rates for lines of credit are currently around 7 percent.  This is a substantial difference.

Vendors often offer a 2 percent discount if you pay in 10 days instead of the normal invoice due date of 30 days.  This is often printed on the vendor invoice as 2/10, Net 30.  In this case you are paying an extra 2 percent for paying the invoice 20 days later (the difference between 10 days and 30 days).  This type of discount works out to a 3 percent interest rate per month or a 36 percent annualized interest rate.  Now that is some serious money that you are passing on.

It should be very clear now that failing to take early payment discounts is definitely one of the most expensive methods of borrowing money.