Financing purchases can allow you to benefit from special financing offers and rewards, but may lead to debt. Cash purchases can allow you to avoid debt, but miss out on the ability to buy now and pay later.
Financing purchases can allow you to benefit from special financing offers and rewards, but may lead to debt. You can avoid debt by buying things with cash, but you miss out on the benefits of buying now and paying later.
You may consider using finance options such as credit cards, payment plans or loans when making a large purchase like a home or car, or when you need some time to pay off a purchase. You might also choose to finance a purchase if you want to earn cash back or rewards on a credit card. Before you make a decision, consider the benefits and drawbacks of financing versus paying in cold, hard cash. Heres when to choose each option.
Deciding whether to pay cash or finance a major purchase can be a difficult decision. Both options have their own unique sets of advantages and disadvantages. In this comprehensive guide, we’ll explore the key factors to consider when choosing between paying cash vs financing.
Overview of Paying Cash
Paying the full amount in cash means you pay for the item completely upfront and own it outright You don’t take on any debt or owe any monthly payments
Pros of Paying Cash
- Avoid interest charges and fees that come with financing
- Own the item free and clear without debt
- Simple transaction without credit checks or loan applications
- May be able to negotiate a lower price for paying cash
Cons of Paying Cash
- Requires having the full amount accessible, which may deplete savings
- Miss out on potential rewards or cashback from financing
- Paying upfront doesn’t help establish or build credit history
In general, paying cash helps you avoid debt and makes the buying process easier. But you have to have the whole amount on hand, and it doesn’t come with any benefits like rewards.
Overview of Financing
Financing spreads out payment for a purchase over time through methods like loans, payment plans and credit cards. You gain use of the item but owe monthly payments plus interest and fees.
Pros of Financing:
- Allows you to buy now and pay over time in manageable monthly payments
- May come with 0% intro APR or low promotional rates, at least initially
- Can help establish or build credit when payments are made on time
- Provides opportunity to earn rewards like cash back or points on credit cards
Cons of Financing:
- Interest, fees, and additional costs increase the total payment amount
- May encourage overspending beyond budget or means
- Missed payments hurt credit score and may incur late fees or penalties
- Loans and credit checks may temporarily lower credit scores
Financing provides more flexibility in how you pay and allows you to leverage credit products. But it also comes with regular payments and additional costs over time.
Key Factors to Consider
When deciding between paying cash vs financing, here are some key factors to think about:
-
Interest rates and fees: Financing options like credit cards often charge high double-digit interest rates along with fees, which can add significant costs over time. Paying cash avoids this.
-
Credit score and history: Financing and making on-time payments can help build or improve credit, while paying cash does not. Those looking to establish or rebuild credit may benefit more from financing.
-
Rewards and cashback: Many credit cards and some financing offers provide cashback, points or miles that can add up to significant savings and perks. Paying cash forgoes these potential rewards.
-
Affordability: Financing lets you pay over time if you don’t have enough cash to pay all at once. But take care not to overextend.
-
Purchase type: Financing tends to make more sense for large, long-term investments like cars or homes. Paying cash may be better for smaller discretionary purchases.
-
Promotional deals: 0% intro APR deals let you borrow money without paying interest at first if you pay it off in the intro period. Leverage these wisely.
-
Personal financial habits: People who tend to spend too much or abuse credit may be better off not applying for loans.
When Paying Cash Makes Sense
Here are some scenarios when sticking to cash may be the better option:
- You have enough cash readily available, so paying outright is affordable.
- You have high-interest debt you want to avoid adding to.
- You don’t need credit or want new credit checks impacting your score.
- You struggle with overspending or credit card debt.
- The purchase is a smaller discretionary item, not a major investment.
- You can’t qualify for low introductory financing rates.
Essentially, if you can afford it, don’t want the debt, and don’t need the credit perks, paying cash likely makes more sense.
When to Consider Financing
Here are some instances when financing could be beneficial:
- You need to free up cash for other goals like an emergency fund or investment contribution.
- You want to earn rewards like cashback and points for your spending.
- You have a major purchase like a home or car that would be difficult to buy outright.
- You want to build or re-establish credit history through on-time payments.
- You can qualify for 0% introductory APR offers to avoid interest initially.
- The interest rate is low relative to your other options and your financial situation.
If you need flexibility in payments, want to leverage credit, or are making a major long-term purchase, financing may be the way to go.
Tips for Smart Financing
If you do opt to finance, here are some tips to do so responsibly:
- Shop around for the best rates and calculate total costs. Avoid high-interest options when possible.
- Make payments on time to build credit and avoid fees. Set up autopay if it helps.
- Have a payoff plan and pay more than the minimum when able to pay off balances faster.
- Limit financing on discretionary purchases that can quickly add up.
- Track rewards and cashback earned to ensure you maximize perks.
- Monitor your credit utilization ratio and keep balances low.
- Take advantage of 0% intro APR deals but have a payoff plan before rates rise.
The Bottom Line
Ultimately, choosing between paying cash vs financing depends on your unique situation and financial priorities. Carefully weigh the costs and benefits of both approaches before moving forward. If you do finance, borrow wisely and have a strategy to pay off balances in a reasonable timeframe. With proper diligence, either option can make sense depending on your circumstances and the type of purchase.
Pros and Cons of Paying Cash for Purchases
If you opt not to finance your purchase, you can instead pay in cash upfront. Just like financing, this option has its own benefits and drawbacks.
- Paying cash can save you money. If you finance a purchase, you may pay interest, which can add up. Paying with cash or debit means the price of the purchase is all youll pay.
- You wont carry or add to your debt. When you pay with cash, youre not spending money you dont haveâor even might not have in the foreseeable future. This can save you money and reduce the financial stress that can accompany carrying debt.
- It wont hurt your credit score. When paying for cash, you wont have to worry about credit utilization, monthly payments or credit inquiries, which can temporarily knock a few points off your score.
- Paying cash wont help your credit score. Because cash payments dont appear on your credit report and arent considered in credit score calculations, theyll do nothing to help your score. When you make timely payments on a loan or credit cardâwhich you can do without paying interest if you pay in full before the cards grace period endsâthat payment activity will be factored into your credit score and can help it improve.
- You wont earn rewards for your spending. Paying cash means youre not collecting benefits like cash back or travel miles you might receive from a rewards credit card.
- It could deplete your savings. If you dont already have a substantial emergency fund in place, paying cash for a large purchase could leave you in a tough spot if an unexpected expense arises.
- You “pay” an opportunity cost. In other words, you wont rake in earnings from investing that cash or putting it into a high-yield savings account.
Pros and Cons of Financing Purchases
When you choose to finance your purchase, you borrow funds with the promise to pay them back over time. Lets take a look at the good and bad points of financing.
- You can spread out payments. This allows you to make a purchase without tying up all your money at once or blowing your budget. Monthly payments can make paying for big purchases more manageable. With purchases like a home or car, it may be the only affordable way to buy.
- You can earn rewards. Charging a large purchase to a rewards credit card can earn you cash back, points or miles you can use toward other purchases, travel and more.
- It can help your credit. Making on-time payments can help you develop a solid credit history and prove to lenders you can be trusted with future loan opportunities. When it comes to credit cards, maintaining low balances is an important factor to helping scores.
- It can allow you to invest your money elsewhere. Financing frees up money to put toward retirement savings and other investments.
- Financing can increase the purchase total. Unless you open a credit card with an introductory 0% annual percentage rate (APR) and pay off the purchase before the intro period ends, youll likely pay interest on your purchase. Depending on what youre financing and how long it takes you to pay off the purchase, interest can add up to hundreds or even thousands of dollars over time.
- It can hurt your credit. If financing purchases leads you to carry high balances on your credit cards, your credit score could take a hit. A high credit utilization ratio, or the percentage of available credit youre using on your revolving accounts, can lower scores. Also, if you forget to make a payment or pay over 30 days late, that late payment will hurt your credit scores and stay on your credit report for seven years.
- You may have less to put toward savings. If youre paying interest on several financed purchases, youll have less money to set aside for your emergency fund, future expenses and retirement savings.
Financing vs. Paying Cash For a Car: Which is the Best Strategy?
FAQ
Is paying cash or financing better?
If you can afford to pay cash without impacting your financial stability, it often makes sense to do so. But if you want to keep your cash on hand and can get a low interest rate, financing may be a good idea, especially if there are incentives.
What is the 20 4 10 rule?
To apply this rule of thumb, budget for the following: 20% down payment: Aim to make a 20% down payment on your new car. 4-year repayment term: Choose a repayment term of four years or less on your auto loan. 10% transportation costs: Spend less than 10% of your total monthly income on transportation costs.
What is the best option to pay for a car?
Pay with cash: If you pay cash for your new or used car, you won’t have to pay any interest or finance fees. This can save you a lot of money. It also means you will not make monthly car payments, which lowers the “transportation” line item in your monthly budget.
Do dealerships prefer you pay cash or finance?
Dealerships don’t want you to pay cash because they don’t earn a commission on arranging financing. If you qualify for in-house financing, the profits they miss out on increase since they don’t have to work with a third-party lender. Jan 10, 2024.