Not all purchases justify full cash payments. Sometimes you need a loan. In fact, there are times when it’s to your benefit to take out a personal loan to finance your purchase over time. How can you tell when you need a loan and when you should pay cash? The answer is different for everyone, but there are a few questions to ask when deciding.
How much do you need the item?
It’s important to differentiate between real needs and wants when making credit decisions. You don’t need a loan for luxuries or wants. If you need a new transmission for your car to get to work each day, that’s a legitimate need worthy of credit use. On the other hand, purchasing a new outfit and concert tickets is a want and your best bet is to pay with cash instead of advancing your line of credit.
How long will you have the item?
Generally, it makes sense to use credit for durable goods you’ll have for years to come. A new washing machine, new tires and even computer equipment make sense to finance. Just be careful not to let the term of your loan exceed the useful life of the item. For example, computer technology changes rapidly and your new laptop may be obsolete after only a few years. Knowing that, you don’t need a loan term of five years because you’ll be paying for your computer long after you need upgrades or a replacement.
Does the purchase enhance your life?
Unfortunately, the rush you get from speeding down the road in a new sports car isn’t the kind of enhancement to consider. Instead, think of ways to better you life circumstances. Perhaps you need a loan to go back to school to get a higher paying job. Maybe you need a loan to add energy efficient appliances to your home for a lasting decrease in your energy bill.
Will paying cash cause a financial hardship?
As a rule, if you can afford to pay cash for your purchases, you should. It may be tempting to accept the credit card or personal loan offer that arrived in the mail, but you’ll appreciate objects more once you take the time to save up for them. This isn’t always possible. Life happens to everyone. Cars break down. Computers crash. Your savings account may not always cover emergency expenses. When this happens, you need a loan.
By evaluating your needs before making credit purchases, you can ensure you need a loan before making potentially damaging financial decisions.
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