What a popular and complicated question! I am going to attempt to answer this with as much clarity and utility as is possible in a one page article. First I want to cover the questions that you must know the answers to in order to make a good decision on getting cash loans. They are (in no particular order): 1) do you have sufficient funds to make the payment on time and with money left over in case of emergency?, 2) is the thing that you are buying either saving you money somewhere else or making you money that is more than the amount that you are paying for interest?, 3) how much is the thing that you are buying going to be worth when you are done making payments?, and 4) are there any sorts of deals that you can get that will enhance the value of the loan for you? I want to use the two classic examples of new cars and houses that people use financing to purchase.
So the first question is purely a common sense type of question and can only be answered honestly with respect to the amount of money that you make. Basic guidelines would be that you should be spending no more than 20% of your budget for everything that has to do with shelter and 20% for every thing that has to do with budget. This brings up the important point that you should always be taking into account the fact that with a house and with a car there are regular expenses that come with both. Now there are ways to make the payment for cash loans less up front so that it eats up less of this 20% and we are going to discuss that in the following paragraphs.
Secondly, there are certain investments that when paid for with cash loans can be used as tax benefits. For our purposes the house represents this type of investment where you get a tax deduction for the interest you pay on the house. This deduction allows you more room to make money with the money that you save by not paying for the house straight up. I am talking about investing this “left over” money in a place that you are actually making more money on than you are paying in financing the loan. Cars offer no such advantage.
Number three you must consider the lasting value of this investment. In my opinion this is the very reason that buying a new car is a bad investment in general and that does not even take into consideration the finance charges that you will incur. It is very possible because of the large depreciation that happens immediately you will end up owing more for the loan (if you want to sell before the loan is up) than you can get for the car. Houses depending on the market and the types of improvements that you have to make may be a very different story, as they generally appreciate rather than depreciate and paying for them (with cash loans) is more acceptable.
Lastly, and this actually applies to both though I really am against buying a new car in general, you may be able to get deals that make cash loans more attractive. This really depends on the economy especially in the sectors of cars and housing for our discussion. The deals often will give you a fantastically low and affordable rate, or allow you a certain period that is “same as cash.” This simply means that any money you pay on the loan for a specified period of time will go directly toward the balance as there is no financing charges adding up.
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