Paying with cash is usually the best option, but it’s not always possible. Even when you do have the money to pay in full, you may want to avoid wiping out your savings account for a single purchase.
The good news is that there are many options available. So many, it can be a challenge to find the best deal. SuperMoney’s financial guides and tools will help you make the best choices for your circumstances.
How to finance a purchase
It’s smart to rate shop before you make a purchase, but not at the expense of dinging your credit. SuperMoney’s loan offer engine allows you to see what rates and terms you qualify for without a hard pull on your credit. Hard inquiries on your credit score can impact your credit score. Soft inquiries, on the other hand, don’t. Our lenders give you a firm rate without hurting your chances of qualifying for another loan in the future. Here is a quick guide on how to finance your next purchase.
- Determine how much money you need. Lenders may offer you more, but you want to keep the amount you borrow to a minimum.
- Check your credit score. This will help you determine what types of credit and lenders you should target.
- Explore your loan options. Plan ahead so you’re not rushed into a last-minute decision.
- Request loan offers from multiple lenders. SuperMoney’s loan offer engine allows you to get prequalified with leading lenders without hurting your credit.
- Compare loan offers. Check the overall price of each option and fine-tune your options according to your needs. Make sure the monthly payments are affordable.
What is the best way to finance a purchase?
This isn’t a one-answer-fits-all kind of question. The best financing option for you will depend on several factors, such as your income, debt levels, assets, and credit history. If you have time, try to save for large purchases instead of always paying with credit. If that is not an option, here are your main options organized from the cheapest to the most expensive.
Secured vs unsecured loans
Borrowing money and using your assets, such as a home or a car, as security is usually cheaper than getting an unsecured loan. However, you need to have those assets in the first place. Also, remember you are putting your assets as collateral, So, you could lose your home (or whatever asset you are using as security) if the loan is not repaid. If that is not an option you are comfortable with, a personal loan or credit card may be a better choice.
Home equity loans (HELOCs)
HELOCs are popular sources of credit for homeowners because they have lower interest rates than credit cards or personal loans. The catch is you need to own a home (duh) and have — typically — at least 20% equity in your home to qualify.
Home equity loans
Home equity loans also use your home as collateral but provide a lump sum instead of a line of credit. They are similar to traditional mortgages, with monthly payments, a set repayment date, and fixed interest rates. As with HELOCs, interest rates are also low and you can borrow large amounts if you have the equity to back it. Having at least 20% equity in your home is also a common requirement.
Shared equity agreements
Shared equity agreements are a relatively new option for financing purchases available to homeowners. It is a financial agreement that allows an investor to acquire a stake in the future equity of your home. There is no debt, monthly payments, or interest rates. However, if the value of your home increases substantially it could get expensive. On the other hand, if your home loses value, you would pay less back to the investor.
Credit cards can be an expensive way to finance a purchase. The average interest rate is around 15% and it is easy to fall in a cycle of debt if you only make minimum payments. However, they are easy to get, convenient to use, and a great source of fast cash in an emergency. If you have good credit (670+) you may qualify for a 0% APR credit card. These cards offer 0% APR on new purchases and balance transfers for 6 to 18 months. If you qualify for a 0% APR credit card, you could finance your purchase interest-free as long as you repay the debt within the introductory period.
Personal loans have an average APR of around 10% for loans with three-year terms. Interest rates are high compared to home equity sources of credit, but you can use them for anything you want, and they are usually unsecured. They also have fixed rates and a set repayment date, which makes it easier to budget.
SuperMoney’s loan offer engine allows you to get prequalified with leading lenders without hurting your credit. It only takes a few minutes to discover what rates and loan amounts you can get.
Find the right lender for your financial goal
The purpose of your loan matters. Niche lenders often have a deeper understanding of their sector and can offer better rates and terms. Whether you’re looking for a private student loan, an auto, a boat loan, a medical loan, a wedding loan, or a vacation loan, make sure you check the deals offered by specialized lenders before you go to your current bank or credit union.
When is it better to finance a purchase than paying it with cash?
Typically, paying with cash is the best option. However, it is not always the case. Wealthy people with millions in savings accounts still borrow money to buy stuff if the rates are low. In some cases, you may be able to borrow money at lower interest rates than what you would earn if you invested the money. For example, if you can borrow at 3% and your investments are generating an average return of 7%, getting a loan may be cheaper than paying with cash.
Finance a purchase with bad credit
If at all possible, it’s best to work on improving your credit score before asking for a loan or line of credit. But you can’t schedule unexpected expenses and emergencies. Even in such cases, there are options available. SuperMoney’s loan offer engine offers a transparent look at the rates and fees charged by lenders that accept borrowers with bad credit.
Whether you are looking into a payday loan, a tribal loan, an auto title loan, or a personal loan that considers applicants with less than a perfect credit report, check out what rates and terms you can expect before you apply. In addition, different personal loans come with different rates, fees, and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.