Is It Better to Finance a Purchase or Pay Cash?

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Finance a Purchase

Will that be cash or credit? Consumers are asked this question countless times a day and as the gears of the economy grow in size and complexity, we’re seeing more “buy-now-pay-later” options emerging from our favorite brands.

For some shoppers, it seems too good to be true. More conservative households are skeptical of anything that requires them to be indebted, even in a small, short-term way. Meanwhile, some customers are happy to finance at every opportunity, taking full advantage of the situation.

In this article, let’s settle the score and determine if it’s truly better to finance a purchase or pay cash. As we’ll soon discover, there’s no cookie-cutter answer to this age-old question.

Type and Scope of Purchase

Before you figure out the optimal payment method, you first need to set your sights on a purchase. Now that everything from sneakers to apartment units to jewelry can be financed, consumers face this decision more frequently in a broader range of circumstances.

But just because you could finance a fresh set of clothes or a new dirt bike doesn’t mean you should. However, too many people fall into the trap of over-financing their lifestyle beyond their reasonable limits.

In general, we suggest financing items that maintain their value, function as an asset rather than a liability, or have significant meaning in your life. This means property, vehicles, engagement rings, which you can often finance with credit jewelers, and other purchases of this kind.

The Benefits of Financing

Some people demonize financing and say that taking on debt is always a negative. This simply isn’t true in today’s highly financialized world, especially in specific sectors where the time value of money is noticeably amplified.

For instance, taking on a mortgage for a home is often the wise move considering how quickly property values rise and the power of compounding. If you can lock in a great deal, it’s a long-term benefit to have that property in your name as soon as possible.

There’s also the matter of building a credit score and becoming someone that lenders trust in a variety of business and personal matters. With a great reputation and strong credit, you’re more likely to get a life-changing loan for a business, education, or other sector.

Besides, credit cards are now loaded with other incentives to spend in a wise and measured way, so long as you follow up with timely payments. Between airline miles, cash back, and other perks, you’re missing out on some major benefits by going all-in with cash. 

If you’re in the market for something small yet pricey like jewelry, consider looking into brands that act as credit jewelers. It pays to check if your favorite brands offer credit jewelers services as this allows you to rock some bling while you pay it off in installments. Like with any financing, though, you still have to ensure that you’re staying within your budget with credit jewelers; it’s easy for shopping to get out of hand, so be sure to speak with your preferred credit jewelers to understand the best financing options for you.

Time Preference and Risk Tolerance

The whole premise of financing is best understood by recognizing the “time value of money” concept discussed by countless economists. In simple terms, money is more valuable the sooner you have it and declines in value as the time horizon stretches longer.

This basic concept has big ramifications for financing on both micro and macro levels. You may be able to finance a luxurious lifestyle right now, but that will catch up with you later when interest and debt pile up.

Risk management also comes into play here. When you take out a loan, you agree to certain terms and conditions with the vendor and the lending institution. By failing to fulfill that agreement, it could affect your credit score and future financial health.

Advantages of Paying Cash

Knowing the basics of financing and the factors at play, let’s take a step back and look at the power of cash in the modern economy. The idea that “cash is king” still holds true to this day, even as inflation lessens the buying power of each American dollar.

First, consider the upside of only using cash. Not only will you avoid interest rates, but you’ll also find yourself free of fees, alerts, calls from the bank, and many other nuisances that can come with living the financed lifestyle.

With a 100% cash-based approach, you can more accurately track what you spend, future budgeting requirements, and other financial resources that create more balanced and optimal conditions. If you know anyone drowning in debt, you understand what a nightmare that can be.

Finally, cash can get you additional perks and savings in the short term. You might be able to negotiate a better deal on a car or house if you pay in cash, or even place a larger down payment on the asset.

Weigh Your Options and Buy Smart

For most American consumers, financing is just part of the game to stay ahead in a competitive society. However, applying this approach to all purchases can result in disaster if you aren’t careful. 

Wield the power of financing wisely and use it to your advantage without getting stuck. With some planning and discipline, you can have the best of all worlds.

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