When you’re buying a home, a vehicle, large appliances, or equipment for your business, you generally have two options to pay for them. Either you shell out money to pay full price outright, or you take out a loan from a money lender Singapore and pay it back in monthly instalments.
You might be thinking it’s better to pay full price immediately, especially if you have the money on hand. Before you decide to do that, though, here are four things to think about.
You might need the cash
Paying for a big-ticket item upfront means you lose all that money right away. What if an emergency hits? What if your home needs a sudden major repair? What if you get laid off?
These financial emergencies are worth keeping your cash. Take out a loan instead to fund the big purchase. Maintaining liquidity – or the state of having enough cash on hand – is always a good financial practise.
Loans can make large purchases more affordable
With loans, you essentially spread out the high cost of the purchase over a long time. For example, you’re buying an HDB flat for $650k, and let’s say you already have enough money to pay for the whole cost upfront.
Instead of shelling out $650k right away, you can take out a property loan with a tenure of 25 years. Doing the math, that means you will only pay $2,167 per month, plus interest, for your new flat. That’s a lot more affordable than writing a check for $650k and saying goodbye to your money in an instant.
Even with the interest, you’re still getting a better deal with the loan. Think of the interest payments as a small cost of keeping your finances liquid.
Loans can improve your credit score
If you’re consistent in making your monthly repayments in full, that’s good news for your credit score. And if you can maintain those payments until the loan is fully repaid, all the better.
As your credit score goes up, it becomes easier to qualify for other loans and credit products. The best part is banks and lenders will give you better terms and lower interest rates if your credit score is high.
You might miss out on opportunities to invest
Shelling out a large amount of money outright has a cost. In our example earlier, if you spend $650k in one go for your new flat, you will no longer have that money. You can no longer use that to invest or start a business when the opportunity arises.
If you took out a loan instead, you will still have most of that money left. If an opportunity comes, and you decide to start a business or invest some of your money, you can. With this, your money will grow as you are paying down your loan.
If you play your cards right, you might end up earning more money than what you have to repay each month. What you earn from the investments you make during the tenure of your loan can help you beat the interest payments.
Conclusion
There’s nothing wrong with paying for a big-ticket purchase outright, especially if you have the money anyway. However, you get a lot more financial advantages when you pay for it through a loan. Consider these four things, and you might just decide that using a loan is much better.
