Pay cash or ask for a loan

When buying something with a high price, we hesitate between asking for a loan or paying cash. Many think: why use our savings if we can benefit from leverage? Others, on the contrary, prefer to avoid debt.

In this article we explain in which situations it is more favorable to benefit from debt and in which occasions payment in cash is preferable. Resorting to savings is for many a very unpleasant option, because they do not want to see the money in their bank account decrease suddenly. This happens when buying assets of high economic value, such as real estate and vehicles.

At Economipedia we explain in which situations it is more favorable to benefit from borrowing and in which occasions it is preferable to pay in cash.

emergency fund

There are purchases that represent a great outflow of money, an outlay that will considerably reduce our savings. Therefore, it is necessary to procure an emergency fund. In this sense, it is advisable to have a margin that allows you to cover between 3 and 6 months of expenses. That margin, added to the amounts already saved, makes paying cash an interesting option.

Do you want a great professional future?

Improve your knowledge in finance by learning from the best professionals, with effective and entertaining courses.

Let’s imagine that we intend to buy a car worth $20,000 and our monthly expenses are about $1,500. Well, our savings should amount to the $20,000 that the car in question is worth.

In the case of the emergency fund, in order to cover an additional 3 to 6 months of spending, it should range between $4,500 and $9,000. Therefore, we should have a total saved between $24,500 and $29,000.

See also  The key to earn more with sports betting: select the bookmaker well

Finally, it should be noted that it is not advisable to pay in cash when the purchase involves spending all of our savings. Thus, if we have $20,000 to buy a vehicle that costs precisely the same amount, it is not advisable to spend it all at once on said purchase.

Completely decapitalizing is never a good option, you never know when an unforeseen expense may come your way.

installment purchases

If we are going to request a loan for an important acquisition, we must bear in mind that it is better to request the exact amounts that we need to carry out the purchase, not to ask for more money than you need. And it is that, the greater the amount requested, the greater the interest that we must pay and the longer it will take to settle the debt.

However, there are situations in which financing a purchase through a personal loan is an interesting alternative. This option is feasible when payment methods are offered in various installments and at 0% interest.

A clear example of the above would be the purchase of a mobile phone valued at $1,600. To do this, the seller offers us the possibility of paying it in 24 monthly installments at $66.63 each installment. There is no doubt that it is a purchase facility that does not entail the payment of interest and that does not mean a big bite out of our savings.

Other aspects to pay attention to are the APR and the TIN. Remember that the APR (equivalent annual rate) is the sum of the interest and additional expenses of the loan. And it is that, as consumers, companies can offer us financing at 0% TIN (without interest), but, if we add expenses and commissions, the effective interest, the TAE, can be at 10%.

See also  Tips for calculating the Christmas bonus

Let’s take an example to illustrate the situation. Suppose we request a loan of $2,000 to finance the purchase of a television. They offer us a 0% TIN and a total of 10 monthly payments to finance it.

We may think that all monthly payments will have to pay 200 dollars. But what about commissions? Suppose you also have to pay commissions valued at $88.75. The cost of financing becomes more expensive, making the APR 10% and for 10 months we must pay $208.88.

Advantages and disadvantages of paying cash

Advantages Drawbacks
-We do not have to pay interest or commissions. -An important disbursement supposes a considerable reduction of our savings. We lose financial freedom.
-Possibility of negotiating the purchase price and getting discounts. -We allocate resources to assets that lose value over time.

Advantages and disadvantages of requesting a loan

Advantages Drawbacks
-We can continue to obtain profitability from our savings. -Financial problems if we exceed our borrowing capacity.
-If the maturities are paid on time, we will have a very favorable credit history. -In case of non-payment there are late-payment interest and commissions that increase the debt.
-We have immediate liquidity. -Unfavorable credit history in case of default.

Thus, when facing the dilemma between paying in cash or borrowing, there are various elements that must be assessed. For this reason, we must weigh how it will affect our financial freedom, what volume of debt we can assume, if we need a great availability of our savings or if the interest payment compensates us.

No less important will be to take into account the possible discounts that they offer us for paying in cash or the circumstance of being tied to the payment of installments during a certain period of time.

See also  Work of art - What is it, definition and concept | 2022

Leave a Comment