Financing Purchase or Paying Cash: Which is Better?
In a world full of real estate terms, it seems you need a dictionary on stand by just to know what everything means. Financing purchases might be a term you have heard, and if we look at the dictionary, you will find that this type of purchase will allow you to benefit from special financing offers and rewards, but can lead to debt. Cash purchases, on the other hand, can help you avoid debt, but you might miss out on the potential benefits of buying now and paying later.
Finance options such as credit cards, payment plans, or loans might all be considered, especially when making a large purchase like a home. Before making a decision, consider the benefits and drawbacks of financing versus paying in cash.
Continue to read to find out which is better between the two, financing purchase or paying in cash.
Pros and Cons of Financing Purchases
When you decide to finance your purchase, you will borrow funds with the promise to pay them back over some time. Take a look at the pros and cons of financing.
- Spread Out Payments. Spreading out payments will allow you to purchase without tying up all your money at once or completely blowing your budget out of the water. Monthly payments for big purchases are more manageable. With purchases like a home, it might be the only affordable route when it comes to buying.
- Your Credit Can Be Helped. When you make on-time payments can help you to develop a solid credit history while proving to lenders you can be trusted with a future loan. When it comes to credit cards, maintaining low balances is important when helping scores.
In the long run, this method of paying can help you to invest your money elsewhere. Financing frees up money to put toward retirement savings and other investments.
Bill Gassett of Maximum Real Estate Exposure said there are a few essential considerations when deciding between paying cash or getting a home loan.
"Paying cash can offer significant benefits for buyers to land their dream home in a robust seller's market. Sellers love cash buyers because it takes the worry of buyers procuring financing off the table. It puts them in a much better position to beat other bidders.
Buyers also avoid some of the closing costs associated with financing. In the long term, a buyer avoids significant interest that makes lenders money.
Conversely, opting for a mortgage allows you to keep more cash on hand for other investments or emergencies, providing financial flexibility. Also, some of your mortgage interest payments may be tax-deductible, providing potential tax benefits.
Everyone's finances are different. It is crucial to weigh the pros and cons of each before deciding."
- The Purchase Total Can Be Increased. Unless a credit card is opened with an introductory 0% annual percentage rate and pay off the purchase before the intro period ends, you will more than likely pay interest on your purchase. Therefore, interest can add up to hundreds and thousands of dollars over time.
- Your Credit Can Take A Hit. There could be a chance that financing purchases lead you to carry high balances on your credit cards, and there is a chance your credit score could take a negative hit. The percentage of available credit you are using on your revolving accounts can lower scores. If you forget to make a payment or pay over 30 days late, the late payment will hurt your credit score and stay on your credit report for a week.
- Less Will Go Toward Your Savings. If you are paying interest on financed purchases, you will have less money to set aside for your emergency fund, future expenses, and retirement savings.
Pros and Cons of Paying Cash for Purchases
If you decide to opt to finance your purchase, you may instead pay in cash upfront. Just like financing, this option has its benefits and drawbacks.
- You Can Save Money Paying Cash. If you are financing a purchase you might pay interest, which will add up. Paying with cash or debit means the price of the purchase is all you will pay.
- You Won't Add To Your Debt. When you are paying with cash, you are not spending money you don't have or may not want to have in the future. This can save you money and reduce the financial stress that can accompany carrying debt.
- Your Credit Score Won't Be Affected. When paying for cash, you won't have to worry about credit utilization, which might knock a few points off your score.
- Paying Cash Won't Help Your Score. Cash payments don't appear on your credit report, and therefore aren't considered in credit score calculations, meaning there is nothing that can be done to help your score. When you make timely payments on a loan or credit card, which can be done without paying interest if you pay in full before the card's grace period ends, that payment activity will be factored into your credit score and can help it improve.
- Your Savings Could Be Depleted. If you don't already have a substantial emergency fund in place, paying cash for a large purchase can leave you in a tough spot if an unexpected expense arises.
- You Pay Opportunity Cost. In other words, you won't rake in any earnings from investing cash or putting it into a high-yield savings account.
The Bottom Line
When it comes to your bottom line, make sure to do the math before committing to financing or paying cash. Check your credit score and credit report for free to see where you stand and find out if there are steps you can take to improve your credit score.