We are always advised to make wise financial decisions, and this involves assessing the alternatives that are still available before us. Is it better to borrow or pay cash? What do you think? Nearly all financial experts will ask you to avoid debts. And honestly, that is a wise counsel. We all know how bad it can be living your whole life in debts. Every end month, you just think of the payments. And something funny is that it is always easy to borrow than it is to repay.
There are cases when borrowing becomes the only way of making ends meet. But we are here talking about a situation where one has cash in hand. Can it be wise to pay cash for a huge purchase or it is better off borrowing? Well, we will be addressing this question throughout this discussion. The truth is that there are circumstances where colonizing either of the options is beneficial. Never assume that avoiding debt is always the best way to go. By the same token, do not think to pay cash is always the best decision. You are only supposed to make decisions between the two based on the financial prudence.
Why do you think the rich borrow? In fact, many wealthy individuals consider checking loan advisor Top 10 reviews online especially when the cost of borrowing is lower. But the logic is simple in this regard. When the interest rates are lower, it means it is less expensive to borrow than to give cash. Well, let us look at these cases in detail.
The Opportunity Cost of Using Cash
Irrespective of the option you are taking, there are always other costs to be incurred apart from the stated price. Think of the borrowing option now. What do you think is the cost other than the stated price? The cost here is obvious; the interest rate you will be required to pay on the borrowed money. Let us do some simple mathematics here. Assuming that you have $10,000 saved and earns 2% APY in a year compounded monthly. At the end of the year, you would have earned interest worth $202. What about after 10 years? My mathematics here shows the amount will be $2,212. Three decades will earn you around $8,212 as interest. This is a lot of money and can be used meaningfully. And what if you decide to pay cash? You will have to forego all these earnings. If you keep in mind the fact that the interest rates have always been on an upward trend, you are likely to earn even more in the next 10years. So, the point is, borrowing is the better option when you consider what you are likely to forego when you pay cash.
Nevertheless, there are a lot of risks associated with borrowing. It is not a guarantee that you are going to benefit when you save the money that you have and finance the purchase of an item. For instance, there are always chances of defaulting. If you finance something and fail to re4pay as agreed, the lender has the right to take the asset and use it to recover the outstanding loan amount. While the risks of defaulting may be lesser in case you have the cash at hand to pay off the outstanding amount at anytime, unexpected events can happen. For instance, you may lose your job or get incapacitated and thus unable to make payments. Still, you may be plagued with a costly medical procedure and use all the cash you have.
Additionally, the investment may fail to perform as expected. Conventionally, the stockmarket is the most appropriate place to invest your funds on a long-term basis. Whether this will continue to be the case is not guaranteed. Besides, the aggregate annual returns may decline. If this happens, you will definitely be disappointed, though the future is unknown. Let us see other instances where borrowing might still be a better option.
Interest Payment Lessens Tax Burden
Many people are blind to this benefit financing rather than paying cash. Usually, the interest cost lessens your taxable earning and therefore cuts your tax expense. The effective interest you will be required to pay will be significantly lesser compared to the nominal interest. You should always factor this lower cost whenever you are calculating the benefits of taking a debt. Even startups can use this to boost their finances. This also distinguishes borrowing from equity selling as an option of financing the growth of a business. When you receive cash from equity, you are just paying the equity holder with funds from the business without any benefit as an individual. Debt guarantees you the benefit of having reduced taxes.
Debt Comes with Financial Discipline
When you borrow, you have to learn to be disciplined when it comes to spending and making investments that can help you. It will be ridiculous to take debt just to discipline yourself. We only mean it can be a positive thing in this regard. Undeniably, the motivation to make effective use of every dollar often fades when you actually have significant cash. This is one thing that can hamper your financial growth or that of your business. With too much, it is easy to start spending on luxuries rather than the basics.
Nonetheless, when you don’t have too much cash, each and every decision that you make financially must be justifiable. Besides, companies can benefit even more from this aspect. It develops cultural prudence across the organization. This is because employees take the responsibility of getting value out of every production phase. The financial that comes with debt can actually keep your business on track for better earnings.
There are so many instances when borrowing is not the right thing to do. It may be just correct to pay cash if your situation allows. However, there are also cases where it is better to borrow than paying cash. We have discussed such instances here. So then, always think objectively before making decisions between the two.