When to finance instead of paying cash | The Motley Fool (2024)

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

Sometimes, cash is the best way to pay for a purchase. Here's when financing makes more sense.

There is wisdom to be found in living below your means, buying only what you can afford, and paying cash whenever possible. Still, financing a purchase can have a place in your life. Here, we'll discuss how to decide when to finance or pay cash.

Jump ahead

On this page:

  • What is financing?
  • When is it a good idea to finance a purchase?
  • When to pay cash instead of financing
  • Should I finance or pay cash?

What is financing?

Financing is when a bank, credit union, or another type of lender lends you money that allows you to make a purchase. You'll typically pay off the loan in equal monthly installments. In addition to any fees charged, you will pay the loan back with interest.

When is it a good idea to finance a purchase?

Financing does, on occasion, make the most sense. Here are a few times financing a purchase is a solid decision:

  • When you have unexpected expenses
  • When you're buying a home
  • When you have an incredible low-interest financing opportunity

We'll go into these in more detail below.

When you have unexpected expenses

Most people have experienced periods when funds were short: a job loss, illness, or another bump in the road. If you need financing, be smart about where you borrow the money and make sure you can afford to repay it.

Some examples:

  • You have to pay for medical bills you didn't expect
  • You need a loan for moving expenses
  • A loved one passes unexpectedly, and financing a funeral is your only option

The silver lining here? Properly managed, financing can help you build a credit history and strong credit score, both of which will benefit you in the future.

Compare the best personal loans

Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.

LenderAPR RangeLoan AmountMin. Credit ScoreNext Steps

Apply Now for SoFi Personal Loans

Rating image, 5.0 out of 5 stars.When to finance instead of paying cash | The Motley Fool (2)When to finance instead of paying cash | The Motley Fool (3)When to finance instead of paying cash | The Motley Fool (4)When to finance instead of paying cash | The Motley Fool (5)When to finance instead of paying cash | The Motley Fool (6)When to finance instead of paying cash | The Motley Fool (7)When to finance instead of paying cash | The Motley Fool (8)When to finance instead of paying cash | The Motley Fool (9)When to finance instead of paying cash | The Motley Fool (10)When to finance instead of paying cash | The Motley Fool (11)

5.0/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
When to finance instead of paying cash | The Motley Fool (12)When to finance instead of paying cash | The Motley Fool (13)When to finance instead of paying cash | The Motley Fool (14)When to finance instead of paying cash | The Motley Fool (15)When to finance instead of paying cash | The Motley Fool (16) = Best
When to finance instead of paying cash | The Motley Fool (17)When to finance instead of paying cash | The Motley Fool (18)When to finance instead of paying cash | The Motley Fool (19)When to finance instead of paying cash | The Motley Fool (20) = Excellent
When to finance instead of paying cash | The Motley Fool (21)When to finance instead of paying cash | The Motley Fool (22)When to finance instead of paying cash | The Motley Fool (23) = Good
When to finance instead of paying cash | The Motley Fool (24)When to finance instead of paying cash | The Motley Fool (25) = Fair
When to finance instead of paying cash | The Motley Fool (26) = Poor

Fixed: 8.99%-29.99% APR (with all discounts)

$5,000 - $100,000

680

Apply Now for SoFi Personal Loans

Apply Now for Upstart

Rating image, 4.0 out of 5 stars.When to finance instead of paying cash | The Motley Fool (28)When to finance instead of paying cash | The Motley Fool (29)When to finance instead of paying cash | The Motley Fool (30)When to finance instead of paying cash | The Motley Fool (31)When to finance instead of paying cash | The Motley Fool (32)When to finance instead of paying cash | The Motley Fool (33)When to finance instead of paying cash | The Motley Fool (34)When to finance instead of paying cash | The Motley Fool (35)When to finance instead of paying cash | The Motley Fool (36)When to finance instead of paying cash | The Motley Fool (37)

4.0/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
When to finance instead of paying cash | The Motley Fool (38)When to finance instead of paying cash | The Motley Fool (39)When to finance instead of paying cash | The Motley Fool (40)When to finance instead of paying cash | The Motley Fool (41)When to finance instead of paying cash | The Motley Fool (42) = Best
When to finance instead of paying cash | The Motley Fool (43)When to finance instead of paying cash | The Motley Fool (44)When to finance instead of paying cash | The Motley Fool (45)When to finance instead of paying cash | The Motley Fool (46) = Excellent
When to finance instead of paying cash | The Motley Fool (47)When to finance instead of paying cash | The Motley Fool (48)When to finance instead of paying cash | The Motley Fool (49) = Good
When to finance instead of paying cash | The Motley Fool (50)When to finance instead of paying cash | The Motley Fool (51) = Fair
When to finance instead of paying cash | The Motley Fool (52) = Poor

5.20% - 35.99%

$1,000 - $50,000

None

Apply Now for Upstart

Apply Now for Citi® Personal Loan

Rating image, 4.5 out of 5 stars.When to finance instead of paying cash | The Motley Fool (54)When to finance instead of paying cash | The Motley Fool (55)When to finance instead of paying cash | The Motley Fool (56)When to finance instead of paying cash | The Motley Fool (57)When to finance instead of paying cash | The Motley Fool (58)When to finance instead of paying cash | The Motley Fool (59)When to finance instead of paying cash | The Motley Fool (60)When to finance instead of paying cash | The Motley Fool (61)When to finance instead of paying cash | The Motley Fool (62)When to finance instead of paying cash | The Motley Fool (63)

4.5/5Our ratings are based on a 5 star scale.5 stars equals Best.4 stars equals Excellent.3 stars equals Good.2 stars equals Fair.1 star equals Poor.We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
When to finance instead of paying cash | The Motley Fool (64)When to finance instead of paying cash | The Motley Fool (65)When to finance instead of paying cash | The Motley Fool (66)When to finance instead of paying cash | The Motley Fool (67)When to finance instead of paying cash | The Motley Fool (68) = Best
When to finance instead of paying cash | The Motley Fool (69)When to finance instead of paying cash | The Motley Fool (70)When to finance instead of paying cash | The Motley Fool (71)When to finance instead of paying cash | The Motley Fool (72) = Excellent
When to finance instead of paying cash | The Motley Fool (73)When to finance instead of paying cash | The Motley Fool (74)When to finance instead of paying cash | The Motley Fool (75) = Good
When to finance instead of paying cash | The Motley Fool (76)When to finance instead of paying cash | The Motley Fool (77) = Fair
When to finance instead of paying cash | The Motley Fool (78) = Poor

10.49% to 19.49%

$2,000 - $30,000

720

Apply Now for Citi® Personal Loan

When you're buying a home

Few people have enough cash put away to pay for a house. Often, financing is the only option -- and that's okay.

What if you have the cash to buy a house without financing? If you can earn a higher interest rate by investing than you'd pay on your mortgage, you'll save money.

For example, let's say you're going to pay 3% interest on a mortgage, and you'll earn 7% on an investment. If you get a mortgage for the house and invest your cash, you'll earn money (as long as nothing happens to lower the amount you're earning on the investment).

When you have an incredible low-interest financing opportunity

Let's say you need a new lawnmower. You have the cash to pay for it, but a dealer near you is offering 0% financing for 24 months.

As long as you pay the loan off before the promotional period expires, there's no harm in financing. Then, you can put your cash into other investments that allow your money to grow. Even low-risk investments, like CDs, can offer a good return in this situation.

When to pay cash instead of financing

There are a couple ways to determine whether cash or financing is the best option for your purchase. The general rule of thumb we recommend is: Pay cash for non-necessities; finance if you're planning on investing.

Pay cash for non-necessities

A good rule of thumb is to always pay cash for non-necessities. Financing a purchase can be easy and lead you to spend money you don't have.

A night out with friends, Bluetooth headphones, or fabulous new shoes (even if they were on sale) are luxuries. A vehicle that proves to the world that you've "arrived," is also a luxury. If you find yourself doing mental gymnastics to justify a purchase, either pay for it upfront or do without.

Finance if you're planning on investing

Another way to decide whether to pay cash or finance: Ask yourself, "Is the interest rate on financing lower than the rate I could earn by investing?"

Let's imagine you have $1,000 extra cash in a savings account. You go to the store to buy yourself a brand-new dishwasher. Once in the store, you are told you can finance any purchase at 6% interest. You have two choices: Buy the dishwasher in cash, or invest your $1,000 in the stock market and finance the dishwasher. Which do you choose?

The stock market, on average, earns more than 6%. If you finance the dishwasher and invest the cash, you'll likely earn money on your investment. If you buy the dishwasher in cash, you won't pay 6% in interest, but you also won't earn anything on the stock market.

Should I finance or pay cash?

It can be tough to decide when to finance or pay cash, but the trick is to consider what you can afford and what else you might do with that money. The question to ask yourself is whether you could earn a higher interest rate by putting your cash to other uses than you would pay in interest through financing.

Financing can help in emergencies, paying for large purchases, building your credit score, and freeing up money to invest. Cash is still king when it comes to buying non-essentials, keeping track of your monthly budget, and staying out of debt.

Part of deciding when to finance or pay cash is simply about doing the math. Figure out which option most benefits your bottom line. In the end, investing and going into debt are both risks -- so you're the only one who can decide whether to finance or pay cash.

The Ascent's best personal loans

Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.

Best personal loans

When to finance instead of paying cash | The Motley Fool (2024)

FAQs

Why finance instead of paying cash? ›

If you have sufficient savings and prefer not to take on debt, paying cash may be the right choice. However, if you'd rather keep your cash for other purposes and have a steady income to cover monthly payments, financing may be a better option.

Is it better to get a loan or pay cash? ›

Financing can help in emergencies, paying for large purchases, building your credit score, and freeing up money to invest. Cash is still king when it comes to buying non-essentials, keeping track of your monthly budget, and staying out of debt.

Is it best to finance or pay cash for a car? ›

Paying cash for your car may be your best option if the interest rate you earn on your savings is lower than the after-tax cost of borrowing.

Is financing a purchase a good idea? ›

Reasons to Borrow

So, if you don't have sufficient savings to buy it outright, debt may be your best option. A pending price increase or special sales opportunity—even when it's something that isn't an emergency need—could also push you into a decision to charge the item.

What is a disadvantage of paying only with cash? ›

Less Secure. Cash is less secure than a credit card. Unlike credit cards, if you lose physical money or have it stolen, there's no way to recover your losses.

What are the disadvantages of paying with cash? ›

The disadvantages of cash:
  • Hygiene concerns. Coins and banknotes exchange hands often. ...
  • Risk of loss. Cash can be lost or stolen fairly easily. ...
  • Less convenience. ...
  • More complicated currency exchanges. ...
  • Undeclared money and counterfeiting.
Mar 14, 2024

What is the rule of thumb for finance? ›

It's Fidelity's simple rule of thumb for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings.

Does financing purchases hurt credit? ›

Buy now, pay later plans can be convenient for consumers, but they do little or nothing to help them build a good credit score. However, if the consumer fails to pay, and their account is turned over to a debt collector, that can do their score serious damage.

How long should you finance a car? ›

Even though the majority of car buyers are going with long-term car loans, is an auto loan of 72 months or more a good idea for you? NerdWallet recommends financing new cars for no more than 60 months and used cars for no more than 36 months.

Does Dave Ramsey recommend paying cash for a car? ›

According to money expert Dave Ramsey, it's the car you can afford to pay for in cash. There are more benefits that come with buying a car using only cash than you might think. Here's why it's always worth it to pay cash for a car.

Why do dealerships prefer financing over cash? ›

It's all about how dealerships can make the most money. Through financing, dealerships make money through interest on loans, making sales people encourage this option the most.

Why do people finance cars? ›

To make the cost more manageable, many drivers choose to finance their car with an auto loan. When you finance a vehicle, you pay for the car in monthly installments, rather than one lump sum. While an auto loan can help you afford a car more easily, there are also some downsides to consider.

Is 100% financing a good idea? ›

Don't Take a 100% Loan if You Can Make a Down Payment

Taking a 100% loan with a piggyback – a first mortgage for 80% of value and a second mortgage for 20% -- would result in a higher overall cost than an 80% loan with a 20% down payment. In part, the higher cost will be in the higher rate on the second mortgage.

What should you not purchase with a loan? ›

You should avoid using a personal loan to pay for college tuition, investments, basic living expenses, vacation, discretionary purchases and gambling, as well as a down payment and the costs associated with starting a business.

Is it better to pay upfront or monthly? ›

If you have the extra cash on hand and are comfortable with committing to a service for an entire year, paying annually may be the way to go. However, if you're on a tight budget or prefer the flexibility of monthly payments, the monthly option may be a better fit for you.

Why do people finance everything? ›

Whether we put it on a credit card or deplete our checking or savings accounts to purchase something, we are financing the things we buy. We are trained to hand over most of the money that passes through our hands. We spend it and give away our ability to earn interest with it.

Why is it better to finance with debt? ›

The advantages of debt financing are numerous. First, the lender has no control over your business. Once you pay the loan back, your relationship with the financier ends. Next, the interest you pay is tax-deductible.

References

Top Articles
Latest Posts
Article information

Author: Nicola Considine CPA

Last Updated:

Views: 6177

Rating: 4.9 / 5 (69 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Nicola Considine CPA

Birthday: 1993-02-26

Address: 3809 Clinton Inlet, East Aleisha, UT 46318-2392

Phone: +2681424145499

Job: Government Technician

Hobby: Calligraphy, Lego building, Worldbuilding, Shooting, Bird watching, Shopping, Cooking

Introduction: My name is Nicola Considine CPA, I am a determined, witty, powerful, brainy, open, smiling, proud person who loves writing and wants to share my knowledge and understanding with you.