When to Finance Even if You Could Pay Cash

By David Weliver

| Photographs By DragonImages

Should you ever go into debt even if you have the cash to make the purchase? Dave Ramsey would definitely say “NO!” But believe it or not, there are situations in which it may actually cost you more if you don’t go into debt!

Let’s be clear: The situations I’m going to discuss in which it’s a good idea to go into debt are few and far between. Nonetheless, they exist.

A second disclaimer: These situations apply when you have the cash available to make the purchase without a loan and/or pay the loan in full after you’ve taken it. You have to be careful anytime you take a loan because you can’t pay cash. Speaking from experience, that’s exactly where debt problems start.

Just one more time: This post is about times when you have cash available to make a purchase but would be better off financing the purchase anyway.

So, what are these scenarios?

1. 0 percent introductory credit card APRs on purchases

It’s no secret that credit card perks like 0 percent APRs on purchases for new cardmembers are going to be harder to come by. That’s not to say, however, that they’ll disappear. If you have great credit and are in the market for a new credit card, you may find some that offer a 0 percent interest rate for six months or a year. If this is the case, why pay it off before the promotional rate expires?

As long as you have the cash to pay the card anytime, let the balance grow and save or invest the money. You’ll earn a return on the cash and whatever rewards the card offers for your purchases. Just make sure you pay the minimum on the card and pay the balance in full before the promotional rate expires.

2. Low APR financing on new cars

If you have really good credit, you may qualify for financing on a new car with interest rates as low as 0 percent, 0.9 percent, two percent, etc. Although it’s generally smarter to buy a used vehicle (due to new cars’ immediate depreciation), we all understand the allure of that “new car smell.” Sometimes, we just have to buy new.

If that’s the case, and you qualify for a super-low interest rate, why not take it? Even if you have the cash, and even if the low rate is 2 percent and not 0 percent … you can probably find a certificate of deposit that will beat the interest rate you’re paying on the auto loan.

Finally, you may be able to use the fact that you are going to finance that vehicle to your advantage. Fact is, car dealers will often drop the sticker price of a new car further if they know you are going to finance instead of pay cash (because they make a cut of the interest you pay, even it’s only two percent). Bottom line: Finance the car at a low rate, even if you pay the loan off in full the first month.

3. Deferred payments

Oftentimes furniture stores, appliance stores, and big-box stores like Lowe’s and Home Depot will offer deals in which you pay no interest on a purchase for a certain number of months. The catch, of course, is that if you’re late with a payment or don’t pay the purchase off in full within the promotional period, you get charged usurious interest rate (almost always well above 20 percent).

BUT, if you know you will pay on time and can invest the amount you would have used to pay cash for your purchase in a high-yield savings account or other interest-bearing account, you can actually make money on your big-ticket purchase.

Summary

Financing a purchase, even when you have the cash to pay for it, can benefit your credit score. But tread lightly. If an emergency occurs and you have to spend the money you have saved up, you could end up defaulting on a loan or getting into credit card debt.

These three scenarios are the only ones in which you should consider financing rather than buying outright. Most other times, you should just pay in cash.


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Tags - Budget, Spending

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