When to Finance vs. Purchase
A number of reasons exist for a person to finance a vehicle or other property having more than enough money to purchase it outright. A common reason for financing is because the person lives on a fixed income without access to the principal. Having a monthly payment along with other expenses automatically deducted from a bank account might be preferable in this situation.
Furthermore, financing also allows the use of a person’s funds on other investments which could possibly earn more than the interest paid on the loan. Many people finance investments using loans and lines of credit, which generally calls for some kind of collateral, generally funds in a bank, therefore making the financing of a piece of real estate or a vehicle much more viable for that person through financing.
Financing has the most obvious utility in real estate investment. By astute financing, assets can be leveraged and multiple income properties bought which can in some cases pay for themselves. These properties are known as positive carry properties.
In a positive carry property, the monthly rent or lease income from the property exceeds the amount of the monthly mortgage payment. This provides the investor with additional income, equity in the property and the possibility of a capital gain if the property is sold for a profit.
Why finance? Because in some cases, paying over time can make more sense than paying all at once, despite the interest costs. Each situation is different nonetheless, so carefully consider the costs of financing and if it makes more economic sense in your particular case.
By InvestorGuide Staff
Posted in ...Personal Finance