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Paying for Major Purchases
Most American households own large assets such as cars and homes. And if you haven't already made a major purchase, you will probably be faced with one at some point in the future. In fact, many of us share the goal of owning our own home.
Before incurring a lot of extra debt or dipping into your savings, you should really determine which purchases are luxury items vs. necessities and how it will affect your financial plan if you go ahead and take the plunge.
How much can you afford?
Before deciding to buy a car, house, or major appliance, you
should first determine what you can afford to buy. If you
can't pay cash, then here are some things to consider:
- What type of down payment will be required? For houses, most lenders like to see a 20% down payment. For other items like cars or furniture, you sometimes don't need to put anything down. But be careful of the "no money down" promises-these often have higher interest rates and monthly payments attached to them.
- What's my monthly payment? The more money you put down, the less your monthly payment will be. Be sure you can make this additional monthly payment comfortably.
- How will this affect me financially? Make no mistake, paying for a major purchase should not be taken lightly. The implications of taking on a large of amount of debt or spending a lot of cash should be factored into your overall financial picture before you make your decision.
Cash or credit
Is this something you can pay cash for or will you need to finance the purchase? How do you know what option is best? Consider the following:
- Cash. Obviously a great option, but a not a realistic choice for all people. If you want to purchase a new sofa, stereo or dishwasher, you could put enough cash aside each month until you saved enough to make your purchase.
- Credit cards. A convenient way to purchase consumer goods like stereos and furniture. But using your credit card for these purchases can also be dangerous. Try to get in the habit of saving for these items. If you really want them, then waiting a few extra months while you save your money shouldn't make too much of a difference. In fact, you'll probably value the item even more because of the extra time and effort it took to buy it.
- Loans. For larger items, such as cars, you may have to borrow money to make your purchase. There are many loans available and it can often be difficult to tell which is the best choice. You get help from a bank loan officer or use the Internet to research rates and terms.
- Leases. A lease agreement is essentially a rental agreement and is an alternative way of obtaining a new car. You pay a specified amount for the term of the lease and when the lease expires, you return the vehicle. Before deciding on a car lease, you should consider financing as well so you make the most informed decision.
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