How Should You Finance Large Purchases That Aren’t Emergencies?
Hopefully, you have an emergency fund to cover unexpected expenses. But what about big-ticket purchases you’ve planned for, but don’t have the cash to cover?
Know:
You have several choices when it comes to financing. The best one for you will depend on your credit, how long you need to pay off the balance, and other factors. So if you’re in need of financing for a non-emergency purchase, read on to learn your options.
Credit Card
This option is best for those who can afford to pay off their balance at the end of the month, or qualify for a 0% APR.
Pros:
- Convenient and widely accepted
- Rewards and cashback incentives
- Interest-free grace period if the balance is paid in full each month
Cons:
- High interest rates if not paid in full each month
- Potential for uncontrolled spending and debt accumulation
- Credit score impact if not managed properly
Credit cards are one of the most common options for financing large purchases. Not only are they convenient, but many cards now exist that allow you to earn cash back or other types of rewards on spending.
As a type of revolving credit, a credit card allows you to borrow against your credit limit and repay it as needed. And as long as you pay off the balance in full each billing period, you don’t have to pay any interest. That’s especially important now, as interest rates across the board have been on the rise. Today, the average credit card rate is nearing 21%.
However, if you want to spread out the cost of a big-ticket purchase over several months without paying interest, you could consider applying for an introductory 0% APR card. As long as you pay off the balance before the intro period is up, you won’t accrue interest.
“If you need more than six months but less than 12-24 months to pay it off, and you have good credit, you can try for a 0% card,” said Crissi Cole, founder and CEO at Penny Finance. Just be careful not to max out your credit limit, as this can harm your credit score.
Personal Loan
This financing option can be used for a variety of purposes.
Pros:
- Quick access to funds
- Fixed interest rates and repayment terms
- Can be used for various purposes
Cons:
- Requires good credit score for favorable interest rates
- May require collateral to qualify
- Closing costs
Personal loans can be used for a variety of purposes, such as consolidating debt, home improvements, medical expenses, funding vacations, or even financing a wedding. They can be unsecured, meaning no collateral is required. Or they can be secured, meaning you need to back the loan with an asset (such as a bank account, vehicle, property, etc.) in order to qualify and/or get the most favorable terms.
Personal loans are installment loans, so you pay back the borrowed funds in fixed, monthly installments–usually, over a period of a few months to a few years. The interest rates tend to be lower for personal loans than credit cards, but only if you have good credit. Many personal loans also come with closing costs and other fees, so it’s important to factor these into the total cost of the loan.
Home Equity Loan or Line of Credit
This option is best for homeowners with significant equity.
Pros:
- Lower interest rates due to collateral
- Tax-deductible interest payments (if used for home improvement)
- Large borrowing capacity
Cons:
- Puts home at risk if payments are not made
- Closing costs and fees
- Possible prepayment penalties
“If you’re a homeowner with enough equity, getting a home equity [loan or] line of credit (HELOC) is an excellent option,” said Laura Adams, a personal finance expert with Finder.com. “You can tap it for a low interest rate and spend the funds however you wish.”
A home equity loan provides a lump sum installment loan, while a HELOC offers a revolving credit line that you can borrow against and repay as needed during the draw period. Both options use your home as collateral, and the interest rates are typically lower than those of unsecured loans. They also potentially allow you to borrow a much larger amount than you could with other financing options, such as credit cards. However, if you fail to make your payments according to the contract, you could be in danger of losing your home.
Home equity loans and lines of credit are most commonly used to pay for home renovations, education expenses and debt consolidation.
Installment Plan
This option is best for specific purchases at participating retailers.
Pros:
- On-the-spot approval
- No interest if paid within the promotional period
- Easy to budget with smaller, fixed monthly payments
Cons:
- Deferred interest may apply if not paid in full within the promotional period
- Limited to specific retailers or purchases
- Requires good credit score for approval
Some retailers (often those that sell furniture and home appliances) offer layaway programs or 0% interest financing installment plans for specific purchases. Cole noted that these plans aren’t as popular as they used to be, but are worth inquiring about.
Layaway or payment plans through a retailer allows you to pay for the purchase in equal installments over a predetermined period without accruing interest. However, it’s important to pay off the balance during the promotional period. Otherwise, you may face deferred interest charges, which can be steep.
Buy Now, Pay Later
This option is best for short-term, interest-free financing.
Pros:
- Interest-free installments
- Instant financing
- Easy online integration
Cons:
- Makes it easier to overspend
- Late fees and interest charges when you miss payments
- Limited retailer partnerships
Buy Now, Pay Later (BNPL) services such as Affirm, Afterpay and Klarna are a type of financing option that allows you to make a purchase immediately and then defer payment to a later date, usually by breaking it down into smaller, interest-free installments over a specified period. BNPL services have gained popularity as an alternative to traditional credit cards and loans, especially for online shopping. In fact, according to Finder’s Consumer Confidence Index, 37% of Americans have made at least one purchase in the past six months using a BNPL service.
BNPL often allows for instant approval, which is convenient, but can also encourage impulse buys and overspending. Also, keep in mind that each provider has its own set of terms and conditions, which may include credit checks, interest rates, and other fees — especially if you don’t make your payments on time.
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