Many financial experts will tell you that if you have the cash on hand to pay for a major purchase, you should pay using that cash on hand. Here’s the problem with that logic: There are more than a few situations when just paying with the cash you have isn’t always the best financial decision. There are reasons to finance a major purchase, rather than pay for it in cash, even if cash seems easier. Here are 3 reasons to finance a major purchase instead of paying in cash.
1. You Qualify for a Great Interest Rate
If you qualify for a low interest rate, you should consider financing a major purchase rather than paying in cash. Why?
Consider this scenario for financing a car:
- You have $30,000 saved up for the major purchase
- You put $5,000 down on a $30,000 loan.
- That loan costs you 2% in interest on $25,000 for 3 years, which will be about $700.
In other words, it costs you $700 to borrow $25,000. What do you do with the $25,000 in cash you already had? Imagine you invest it and earn 5 percent interest (a conservative annual return). That’s $1,250 in the first year of your investment!
You could actually make money if you invest it, rather than use it to pay for a major purchase.
When you are faced with the choice of paying in cash or financing the purchase, run the numbers. As always, when in doubt, talk to a financial advisor about investment options and the expected returns.
2. You Haven’t Saved Enough Money
Saving is crucial to good financial health because it helps protect your finances during emergencies or unexpected expenses. Financial advisors encourage you to have at least these three categories of savings at all times:
- An emergency fund with at least $1,000
- Enough money to cover insurance deductibles
- Savings of 3–6 months of living expenses.
Until you have enough saved to cover all three categories, you should be holding onto as much cash as possible to build up your savings. Ask yourself which will impact your financial health more: little savings or a monthly bill.
Until you have at least enough saved to cover all three, try to start saving a little each month (or paycheck), until you reach these savings goals. In the meantime, consider financing to make your major purchases, in place of cash that you could be putting toward savings.
While cash is accessible, even in a savings, sometimes it’s best to keep it safe for when you really need it.
3. You Want to Improve Your Credit Score
Credit score is the indicator of your financial health to lenders and includes how well you can manage your finances, and debt. However, building up your credit score can be complicated.
Lenders want to see that you are worth lending to. Taking advantage of financing options can be an opportunity to build your credit score. If you use a financing option, and remain in good standing, then you could see your credit score improve. There are plenty of other factors that make up a credit score, but regular on-time payments are the easiest way to maintain good credit.
Do What Makes the Most Sense for You
When trying to decide the best way to fund a major purchase—with cash, special financing, or through a loan—make sure you 1. Understand your financial priorities and 2. Make the choice that fits you and your finances.
When paying for a major purchase, ask yourself:
- How will I get the most return for my money?
- Am I comfortable letting go of that much cash when I could be saving it?
- Do I have the income to make a monthly payment for the financing option?
- Is there a more useful way to spend the cash?
While paying in cash is easy, financing may actually be the option to add up in the end. Learn about your financing options with Best Egg.
This blog is for informational purposes only. Best Egg does not give or solicit official investment or financial advice.