It is no secret that paying for something in cash may come with a lot of benefits. Conventionally, people recommend buying in cash rather than applying for a loan. However, there are often many benefits to financing or getting a loan that might be more beneficial for other people.
Financing is simply the process of providing funds for a business, purchase or investment. There are several types of financing, but the most popular one is debt financing. This is when you borrow money to pay back later with interest. Most Americans are familiar with debt financing. Simply put, it gives a person or a company enough funds that they can later repay in monthly installments.
Financing is often a choice people have when buying a house, a car or something else that might be too expensive to be paid for in one lump sum. However, while you may sometimes get a discount for paying in cash, there are also a lot of benefits to getting a loan.
Benefits Of Financing
Before you pay in cash, consider the following benefits of using financing.
Having no credit history can be a disadvantage, just like having bad credit can be. Since you have no record of using credit, lenders cannot tell if you are a reliable borrower. Using small amounts of credit with a loan or credit card and paying your balance on time will help you establish a good credit history.
Saving Your Emergency Funds
If you follow the rule of having an emergency fund that is equivalent to 3-6 months of your income, you have money you can easily spend for anything you want, such as a new car or expensive furniture. However, the idea of having emergency savings on hand is to make sure that you will not have a financial crisis down the road when there is an actual emergency.
Having emergency funds gives you a lot of flexibility to apply for a loan, since you will not worry about suddenly getting fired from your job and losing your income.
If you do not keep an emergency savings account but do have a large sum of money in savings, it is better to turn this money to your emergency funds and instead take out a loan for other expensive things you might want to buy.
Cashback, Rewards and Insurance
One of the best perks about financing is that you can sometimes get cashback and rewards that you would not be able to get if you paid for your expenses in cash. For example, certain credit cards give you cashback or points rewards when you use the card to pay for certain things. It is a way of making money just by spending money responsibly.
Some credit cards also offer purchase protection benefits. If you are buying expensive gadgets, you can use a credit card with purchase protection benefits. With this feature, you will get refunded for the amount that you purchased in case of accidental damage.
There are also credit cards that have a price protection benefit. This feature can refund a certain amount to you if the item you bought went on sale within days of you purchasing the item. You will receive a refund for the difference between the amount you paid and the sale price.
When Is Financing Better Than Paying Cash?
While there may be a discount when you pay in cash, there are certain cases when paying through financing is better than spending the same amount in cash.
When Financing a Home
For most people, owning a home is impossible without financing. Taking out a mortgage allows you to get all of the benefits of homeownership while hanging on to your savings and keeping your budget afloat.
There are several home financing options, such as in-house financing or getting a mortgage loan from a bank. There are several benefits to in-house funding, which is when a developer finances your home or condominium. This can sometimes be the best option for people who are qualified. You may be able to get a fixed interest rate from the developers of the house, lot, condominium or townhouse.
For One-Time Purchases
There are certain expenses, such as vet bills or buying new furniture, for which financing may be a better choice than using your cash. For example, if you have to pay for a wedding or need to purchase a car or expensive furniture, it might not be ideal to use most of your cash. Instead, it may be better to get a loan.
There are also sudden expenses that you have to pay for but that are not quite an emergency, such as a trip to the vet or repairing part of your home. It is not ideal to use your emergency savings for these expenses, as you might need your cash for something else down the road.
If You Have Favorable Conditions to Start Investing
If you have saved enough money to buy something and you also have your emergency funds to help you in case of a financial crisis, you might want to use your extra cash for investing. Financing can allow you to make other purchases while you invest your extra cash. As long as the return on your invested money is more than the interest rate for things you finance, you will be ahead financially.
With some financial know-how, you can look at the return you might get investing conservatively in a stock market portfolio or putting your extra cash in a high-yield savings account. Then, you can compare it to the average interest of loans for the financing you need.
If the money you will earn when you invest your cash is higher than the interest rate of your loan, you should definitely take a loan instead. Ultimately, you can let the yields from your investments pay for the interest rate of the loan.
While there are certain conditions when paying in cash is more favorable than financing, that is not always the case. While financing a purchase does add to your future monthly expenses, there is a lot of flexibility that financing gives you. The decision is entirely up to you, but an educated consumer should know about the perks of both financing and paying in cash before making any major financial decisions.