Payiing in Advance - Is it Worth it?

You know how credit cards work: you want an item right now, but you don't have all the  money for it yet. So, you purchase the item with a credit card; meaning, a bank is actually buying the item for you, putting its money upfront in order to transfer the chic item from the store's shelf to your lovely home. A few weeks later, you receive a little note from credit card's bank, reminding you of the kind favor it recently performed on your behalf. The notice lists the amount of money it spent for your item, and asks for repayment, plus a little extra financial bump for having gone to the favor of fronting the funds for you. That "bump" is the interest payment you agree to pay when signing on for a credit card.

Advanced payment energy plans for utilities work similarly. The difference is, when agreeing to this kind of plan, you switch roles, becoming the money lender. Since you're the one providing an immediate financial presentation, you get to collect a financial bump in return for the favor. Only in this case, instead of receiving a cheque for funds, you get your bump in the form of a discount from prevailing energy rates. Your final energy expense tally goes down and the corners of your mouth turn up, as you mentally pat yourself on the back for cleverly beating fluctuating rate changes.

Now, About Those Upfront Costs...

Each power company offering this kind of arrangement has its own set of rules and regulations. Some companies may award a discount of up to 10 percent on energy bills to those who buy whole plans, upfront. Other companies may compensate consumers with a significantly smaller discount. 

To determine whether this prepaid approach is a smart move for you, it's important to consider your opportunity costs. Say, for example, that your upfront cost would be £1,500, with a bonus discount of 3 percent on prevailing rates. Once you pay the £1,500 now, you would no longer have access to those particular funds. In order to relinquish the entire £1,500 right now, you'd have to say that this group of money does not need to be spent toward your children's orthodontics, nor toward automotive repair (planned or otherwise), nor toward groceries, nor toward a vacation, nor toward gifts for birthdays and holidays, nor for any other purpose, throughout an entire year's time. In addition to paying out the £1,500, you are also paying the cost of the opportunities lost for lack of funding, once this collection of money is spent toward utilities.

If you are certain that you have sufficient, reliable funding to see to your other financial needs throughout the year, then it may certainly be well worth your investigating advanced payment energy plans. Not only can it allow you to purchase fuel at a lower cost, but it can also secure your dedication to making good on the specific account through a kind of forced commitment. Once the large payment has been made, the "ship has sailed," so to speak, and you needn't spend time the rest of the year wondering whether you'll be able to make your power payment.

However, if you think there's a realistic possibility that you might regret putting that £1,500 out of your reach, then the red flag you feel in your gut pretty much tells you everything you need to know about how to proceed.

And, About Those Rates...

Even a cost reduced by a tiny few percentage points can make a big difference, especially as prices continue to climb. But just because you get money back (in the form of a discount) does not mean you have actually saved any money at all.

Consider the example discount rate of three percent. Whatever the public is paying for energy, you get a three percent discount as a thank you in exchange for your benevolence in paying the utility company upfront. Sounds good; but--remember, the figure is a discount on prevailing rates. 

Purchasing a bulk amount of power is not necessarily--if ever--the same as obtaining a fixed rate tariff. If prevailing rates end up far higher than today's current prevailing rates, then your three percent discount may prove to be quite an increase from what you're already paying today, which makes the appeal moot. Advanced payment energy plans may not be your best bet, but you won't know until you crunch the numbers using your own personal figures.

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