There is a widespread perception that taking out a loan to pay for something is always a worse option than paying for it upfront in cash. That is largely due to the belief that debt is a bad thing, and in many cases it really is.
However, there are times when it simply won’t be possible to pay all of the cost of a purchase right away and when it will be necessary to finance it. In some situations – when buying a home for example – it is by far the most common and sensible strategy.
Table of Contents
- When Financing will be the Best Option
- The Pros and Cons of Finance
- The Pros and Cons of Paying Cash
When Financing will be the Best Option
The term ‘financing’ just means a loan from a credit union or bank that you will pay back in installments with added interest. There are several different instances where taking out finance to purchase something will be a smarter choice.
One example of this is when you are buying a house. Not many have the sort of cash to be able to pay the cost of a house upfront, which is why most people take out mortgage financing to buy their first home.
Choosing to finance will also be a good idea when there is a loan available with very low rates of interest. This is often the case with car purchases, as the majority of these loans are repaid so they are low risk for lenders.
Financing the purchase will leave you with money that can potentially be invested. If you can earn higher sums from investing than the loan interest repayments, financing could actually help you make money – which is why so many rich people use it.
One thing that will hurt your chances of getting financing is a bad credit score. However, there are places that will offer lower loans for small items like car tires and regular repayments of these loans can be used to rebuild your credit rating.
The Pros and Cons of Finance
The single biggest plus point to using financing to pay for something is that it will leave you with money that can be invested. With the right investments, you can have enough to comfortably repay the loan debt and still end up with more than you started out with.
Secondly, finance lets people afford things that they otherwise would not be able to, such as property. Being able to pay sizeable costs over a longer period is often the only reason people are able to afford a home for their family.
The single biggest drawback of financing is that there is always the possibility that you will not be able to repay the loan. If your economic circumstances change – say, you lose your job – that can seriously impact your ability to pay it back.
In that situation, you would lose the home; car, or whatever other item was being paid for via a loan.
The Pros and Cons of Paying Cash
Paying for something in full using your own money means that there are no debts or interest payments to worry about. It also ensures that you own the thing outright so it cannot be repossessed.
Furthermore, although financing will leave you money to invest, there is no certainty that these investments will pay off. In that situation, you could lose your money and be faced with repaying the cost of a loan.
It is at times when you have a very strong investment opportunity that choosing cash payments will be a drawback. They could rob you of the chance to significantly increase your cash reserves.
Financing can be a fantastic opportunity and can help you earn money, but you must be sure you can afford to pay back any loans you take out.
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