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When To Finance Even If You Could Pay Cash

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. What are the scenarios?

1. 0% Introductory Credit Card APRs on Purchases

It’s no secret that credit card perks like 0% 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 zero 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 (and in the post-subprime mortgage meltdown world, I mean, reaaaaaallllly good credit), you may qualify for financing on a new car with interest rates as low as 0%, 0.9%, 2% 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% and not 0%…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 farther 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 2%). Bottom line: Finance the car at a low rate, even if you pay the loan off in full the first month.

3. Deferred Payments

Often times furniture stores, appliance stores, big box stores like Lowes 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 are 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%).

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.

What do you think?
Would you finance in these situations even if you could pay cash, or still opt for paying cash and saving yourself the headache of an additional monthly bill? To be sure, the money you can make yourself in these situations is minimal, but it is still “money for nothing…”

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I agree with you, but I think as you point out, the key is to have the cash on hand and be able to pay the loan off in case of anything.

    That and obviously not using the cash for other things…

    Not having the cash, most people start these loans with the best of intentions, only to have something happen a few months in – job loss, income reduction, health emergency, whatever… Life isn’t fair but we can surely prepare.

    Nice post.

  2. I would definitely utilize some of these situations if the opportunity presented itself. I tried this once, and was one day late on the minimum payment; the company quickly revoked the intro rate, and charged me a huge late penalty. If one is taking this route, MAKE SURE you keep on top of the minimum payments.

  3. I think that there are also times when people even have enough money to purchase a house outright, but I think that a house is another situation where it is better to “go into debt”. I think this probably goes for when someone is into real estate investing and has the money from their passive income, but it still counts as a situation.

  4. While on the surface these all look like good opportunities, you have to remember that they are being offered to benefit the company. The credit card company is hoping that you’ll run up a balance and not really end up paying off the money at the end of the term. Most card users say they will set the money aside, but then something comes up. The same goes for the no interest furniture.

    It takes someone with great discipline to be able to handle doing this type of thing. Most people think they can handle it, but many fall into the trap.

  5. Thanks for this post. I currently or in the past have utilized each of these methods of buying with debt and feel slightly better about my economic situation knowing the methods are actually endorsed by someone other than me.

    I think your cautions of making sure to stay on top monthly payments is well founded, but I also think its important to point out that a lot of the ways these companies “get you” with credit cards is telling you to make the “minimum” payment, which, at the end of your deferred interest period, will only pay off half the balance and all the interest will hit you anyway. This can easily be avoided by calculating and paying the minimum monthly payment required to pay the card off a month before the promotion expires (just to give you some cushion room). Either way, when it comes paying off things like loans and credit cards, “constant vigilance” is the best advice…..

  6. The strategy of acquiring a debt when one could pay cash for a purchase can have both positive and negative effects on one’s credit rating. I am assuming here the cash is kept available to pay off the loan at any time, and the individual is disciplined enough to stay atop the payments in the meantime.

    Having different types of credit on your credit report can increase your score. Most people have credit cards (revolving credit), but not everyone has an auto, student, or home loan (installment credit) on their credit report. Even if you’ve had a successful installment loan in the past, it may have fallen off the report after seven years or so of the payoff date. Check your credit report. If you need to diversify your types of credit, taking out a car loan, for instance, when you might otherwise pay cash is a great way to do that.

    The downside is applying for new credit can decrease your credit score, as can actually acquiring the debt into your credit portfolio. Additionally, if you don’t make larger-than-required payments on the loan, your debt-to-credit ratio will probably increase.

    The bottom line is time. If you need your score to be high in the long term (say, if you would be shopping for a home mortgage 18 months from now), take out an installment loan to diversify your credit and raise your score. If you need your score to be high in the short term (you might be shopping for that home mortgage in the next four months), opening new credit accounts can lower your score, in which case you should pay cash for the item(s).