Whether you’re trying to buy a car, a home, a new business or pay for a major renovation, you most likely won’t be paying for your major purchase with cash. Most people will turn to some kind of financing option for theirs, which is perfectly normal. It can be exciting making a huge purchase, especially for a milestone like being a first-time homeowner, or buying your first car, but it can also be overwhelming looking at different financing options.
Before throwing everything on your credit card and hoping for the best, check out these tips on how to finance a major purchase responsibly.
Open a Separate Savings Account
If time is not of the essence, for example, if this is an emergency situation, it’s in your best interest to start saving early. Open a separate savings account—preferably one that has low fees but a high yield—and start putting money in every month. It doesn’t matter if it’s a small amount, or a large amount once a month, as long as you stay consistent. To make the process easier, you can automate the deposits once you’ve looked over your finances and checked what you can afford on a regular basis. That way, you can set it and forget it, and watch the amount in your savings accumulate. Even if you don’t save up the entire amount of your purchase before you buy, it will help to pay off as much as you can, without turning to other financing options, like loans or credit card debt.
Get a loan
Consider personal installment loans as another way to finance a big purchase if you don’t have enough cash on hand. You borrow a specific amount and repay it over time with fixed monthly payments that are clearly laid out to you before the loan amount is released to you. You are aware of the costs, the repayment plan and any fees you’ll incur if you miss a payment. These short-term installment loans are a great way to get some immediate funds without getting yourself into huge debt or entering into predatory repayment contracts.
Use Your Credit Card
Putting a major expense on your credit card can be risky if you aren’t sure what to be aware of. Most credit cards have a high-interest rate, but sometimes it’s the only option in an emergency situation. Compare your credit cards’ annual percentage rate (APR), which is essentially how much the loan will cost you in a year. If you have multiple credit cards in your wallet, one might have a lower APR than the rest, which would be the better card to put your purchase onto. Do some research as well to find out if there’s a credit card you don’t have that has a better APR. The ticket to getting a low-interest rate credit card is having a really strong credit history, plus you won’t want your credit score to take a hit after putting a major purchase on your card, so make sure you pay your credit card bills in full and on time every month.
Get a Second Source of Income
If this is not an emergency and you have more time to save up, consider finding another way of earning some extra money. Assuming you already have a full-time job, getting a part-time job in your time off can be quite lucrative. You could also find a way to monetize a skill you already have or a craft you already do and turn it into a profitable side hustle. It might feel daunting, working more than you already are, but it would just be in the short term and can help you avoid major debt and financial burden in the long run.
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.