What’s Okay to Finance and What Should You Pay For in Cash?

If you are building your credit and learning healthy financial habits, it’s important to understand the differences and the pros and cons of financing versus paying for things in cash. Ultimately, understanding interest rates and payment plans help arm you with the skills you need to make a decision that’s best for your needs.

Financing is an option for nearly everything these days, it seems. When you turn on the TV, you’ll see options to finance cars, couches, furniture, cell phones, engagement rings, and more. Financing is often an option provided by businesses and institutions, but it shouldn’t always be used. More often than not, financing can leave you strapped with exorbitantly high interest rates that make what you bought twice as expensive.

However, financing can help build your credit, particularly if you are smart about what you choose to finance. Many people finance cars, taking out an auto loan which helps determine your monthly car payment. What’s important to remember is those who approve you for financing don’t want you to make your monthly payments on time — it benefits them if you mess up on your monthly payments because that will raise your interest rate. If you do finance, putting down a larger down payment will reduce your monthly payments. If you have a co-sign, remember that they take liability if you default on the loan.

Better ways to build your credit include opening a secured credit card with a low credit line and making 6–12 months of regular, on time payments that don’t exceed 30% of your credit limit. This shows creditors and financial institutions that you are responsible with borrowing money.

It’s always a good idea to pay for shorter term investments — such as furniture — with cash. Saving the option of financing for items that are high quality and will last a long time means you don’t take financing lightly. If you are constantly financing a new TV, a new car, a new iPhone, or a new laptop, you’ll be paying a lot of monthly payments and trying to keep up with these payments makes you vulnerable to miss a payment on one or more items you’ve financed.