This is a guest post from the folks at MoneySupermarket.com
You have several different options for payment when it comes to big ticket items. Most people choose to use money from their savings, their loans, or their credit cards. Deciding between those three can be a real challenge.
There is no “one size fits all” as each person or family has their own unique situation. However, it is important to look at the benefits and consequences of using one form of payment over the other two.
Savings Account: Benefits.
Making a large purchase from your savings account can be a great feeling. You have saved and saved and now you can go out and buy exactly what you want. It probably took weeks or even months to come up with the money that you needed, but you did it. You will probably feel a real sense of accomplishment as you hand over the funds.
You own this item free and clear. No bills will be coming to your house at a later date. There is no interest to pay. Whatever your big purchase is, it is all yours!
Savings Account: Consequences.
Once that big purchase is made, along with that satisfied feeling you may also have a little bit of panic. When you remove large amounts from your savings account, you drain down what you have in case of an emergency.
It seems to be that many times Murphy’s Law will take over and the next week something else will require some of the money you had tucked away. If this is the case, you may be frustrated with the fact that your savings money is gone and you have to scramble around to find another way to pay.
Loans: Benefits.
When you sign up for a loan to make a large payment, there are some benefits if you shop around. Many times, you can find a furniture company or even a car dealership offering a 0% interest loan provided that the amount if paid off in a certain number of months or years. If this is the case, you don’t have much to lose if you know you can make the payments on time and get the amount completed before the deadline. You can reserve your savings for emergencies and pay this way instead.
Loans: Consequences.
Most loans come with some type of interest rate. This means that you are paying more for your big purchase because you are financing it with loans. Even if an item is on sale, by the time you take out a loan you could be paying the regular price or even more when the interest is figured into the price. If you are going to use any loans, be sure to search out the best interest rate.
Credit Cards: Benefits.
Using a credit card is easy. You don’t have to touch the emergency savings account and you usually don’t have to go through a long drawn out application process. You need a card, you fill some paperwork out and you have instant credit. Making a large purchase is even better when you earn points, miles, or gift cards for your large purchase. If you want, pay it off as soon as the bill arrives.
Credit Cards: Consequences.
Paying with a credit card means paying interest. With some cards, the rates are through the roof and you can end up paying so much more than whatever your big ticket item is worth. Be sure to read all of the terms and conditions so you know when your payment is due and how your interest rate is calculated.
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Hi Mike,
You made some good points regarding what form of payment to choose when buying a big ticket item. I think so many people don’t take into account the repercussions of depleting their savings or racking up charges on their credit card that they will probably be paying off at high interest rates for a long time. I like the way that you laid out the actions and consequences in black and white to catch the reader’s attention.
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