in almost every situation, paying up front is the better deal. but who wants to instantly pay $800-1000 for a cell phone? who wants to drop instant cash on a car or a house? nobody except the uber rich and even then, they usually don't because with the low interest rates, it's better to take that loan and either spend the money on other needs or invest the money not spent which can get you back more than the interest spent.
all conjecture on my part but if you're getting a subsidized console where you already paying for Live to get that subsidized price, then it'd be redundant to have Live cards and it would make them unnecessary for the person until the contract is up. but you'd still want to add them to your account so that once your contract is up, you still have Live time and Gold at a discounted rate (assuming you got that card because it was discounted).