When it comes to making a big purchase, financing can seem like a great option. It allows you to reduce the upfront cost of a particularly expensive item, providing you the sound peace of mind in your purchasing decision. Yet, the question of whether or not you should finance your next big purchase still weighs heavy. This is due to Americans being burdened with a variety of debt.
Student debt, credit card debt, and other loans are part of American life. What debt you may have will be a big factor in deciding whether or not you can afford a big purchase, financing or not.
When considering whether to finance your next high-priced item, the questions should not be whether or not to finance it. The question you should ask yourself is, "Can I finance my next big purchase responsibly?" If the answer is no, then financing is not for you. If yes, financing can help bring home that luxury piece you've always wanted.
What is Responsible Financing?
When you decide to finance you are doing so with the hope of reducing the upfront cost of an expensive item. This allows for more flexibility and sound financial footing in the present. What you need to understand, however, is financing a big purchase makes that buy more expensive in the long run.
Financing works and is offered by credit card companies, corporations, banks, and other lenders because they receive an additional percentage or fees on top of the original purchase amount. They do so while extending flexible payment options that reduce the initial cost of the item.
When all is said and done – at least in most financing cases – you will end up paying more than the original listed price. That is how financing makes money.
Responsible financing is financing purchases you know you need and know you can afford. It means shopping around for the best rates, understanding your payment options, and seeing whether or not you can make a larger down payment to reduce the amount owed monthly.
Finance Only What You Need
A great tip for financing purchases responsibly is to use it only for those purchases you need. This means you aren't buying a luxury boat or big ticket item that will be used as an impressive showcase.
Financing what you need in life makes you more apt to continue making payments. If you finance only desirable items you may be prone to slacking on payments or needing to divert payments away from them to cover necessities.
Finance what you need, and save for what you want.
Shop for the Best Rates
There are many types of financing options out there. They all come with different fees, structures, and rates. It is important you understand them all and shop around for the best rates.
Companies often offer promotional financing where you can receive 0% interest over a period of time as long as you qualify and make payments on time. If there are no offerings extending promotional financing you'll need to shop around. Look for credit cards with low APRs, try to keep hard inquiries on your credit report to a minimum, and deal with companies that clearly show you how much you will eventually end up paying compared to the initial amount.
When to Finance
There are times when you should finance and times when you should not. Understanding when and when not to can have a significant impact on your financial future.
Financing is a form of debt. By choosing to finance a purchase you are entering into an agreement where you will owe money in the long run. While debt is often seen in a negative light, there is such a good thing as good debt and bad debt.
Good debt is the debt you can manage responsibly and the debt that benefits your financial profile. It is that debt that positively impacts your credit score and leads to better buying power in the future.
When you decide to finance a purchase you should do so with the knowledge that you can afford the purchase in full. This means having the cash necessary on hand but deciding not to pay the full amount due to other reasons. By having the ability to pay for the entire purchase you set yourself up for success.
Credit card perks and finance options are aplenty. You should do your best to find the best options with low APRs and flexible payment arrangements. Look for a card with extended 0% APR period. As long as you make your payments on time and pay down the balance, you accumulate no added interest.
There are situations where you may have trouble getting approved. If you have a low credit score it will be hard to find ideal financing options. More premiere APR offerings are extended to those with good to excellent credit scores. These individuals have demonstrated the ability to make payments on time and in full. Make sure you are on top of all your payments and current debt in order to best position yourself to receive an outstanding promotional APR offer.
When you consider financing a purchase look for stores and promotions offering deferred credit or interest options. Through this finance perk you are able to pay no interest for a particular period of time. That is as long as you make your payments on time and pay the purchase in full in the allotted time frame.
These types of deferred credit and interest options are found throughout the retail industry. From big box stores to credit card companies, finance organizations and small businesses, deferred credit with zero percent interest options are increasingly popular. Always make sure to read the fine print in these deals, however. Doing so allows you to understand how to take advantage of the promotion while avoiding interest charges at all costs.
How to Save
Responsible financing starts with responsible saving. What does that look like?
If you have a big purchase in mind and can delay instant gratification you will need to set aside money for the eventual purchase. To get there faster the equation seems relatively simple. Set aside more money than you spend. Do this as fast as you can and in the greatest amount. But things aren't often as simple as they may seem. There are other factors that come into play when saving money for big expenses.
When you start saving money for a big purchase you need to do so with the intent of not drawing from that pool of saved money. Should any unexpected expenses pop up, you may be tempted to take from what savings you have established. You have to resist the urge. Remind yourself what the money was set aside for.
Also make sure to cut other expenses where you can so you can contribute to savings faster. Eat-out less, take alternative transportation options around town, and find ways to reduce energy costs. These small changes add up fast when it comes to increasing the amount of money you save.