Financing a Big Purchase

You have a pressing need for an expensive item, or you see something that you absolutely must have when you’re out shopping. The only problem? You don’t have enough cash to cover the cost upfront. 

Does that mean you have to walk away from the purchase? Not necessarily. There are plenty of financing options available that allow you to borrow money to make an expensive purchase. 

Can You Finance A Big Purchase?

If you don’t have enough cash in the bank to finance an extra-expensive purchase, or don’t want to wipe out your savings account entirely just to make the purchase, there are other ways to carry out the transaction. Here are some financing options that may be available to you:

  • Personal Loans
  • Credit Cards
  • Lines of Credit
  • Home Equity Loans
  • Buy Now Pay Later Programs

What Are Some Types Of Big Purchases You Can Finance?

  • Motorcycles
  • Boats
  • Recreational vehicles
  • Jewelry
  • Furniture
  • Electronics
  • Musical instruments
  • Appliances

Ways To Finance A Big Purchase

There are several ways to finance a large purchase. Each option comes with its own set of perks and drawbacks. Consider each before deciding which route to take. 

Personal Loan

A personal loan involves your lender lending you a specific amount of money in one lump-sum payment, which you will then repay via installment payments. Each payment you make includes a principal and interest portion. 

The interest rate charged will depend on a few things, including your financial health, credit profile, and the lender you work with. The full loan amount will need to be repaid by the end of the loan term, which is established when you first take out a loan. 

Pros Of Using A Personal Loan For A Big Purchase 

  • Versatile. Unlike car loans, mortgages and student loans that are dedicated for specific purposes, a personal loan can be used for just about any purpose. 
  • Lower interest rates. The rates that come with personal loans tend to be a lot lower compared to other financing options, such as credit cards. 
  • Higher borrowing limits. You may be able to qualify for a higher loan limit with a personal loan compared to your credit card. 
  • No collateral. Personal loans tend to be unsecured, which means there is no risk of losing a valuable asset if you default on the loan.

Cons Of Using A Personal Loan For A Big Purchase 

  • High fees. Personal loans sometimes come with higher fees and penalties compared to other loan types, which can increase the cost of borrowing. 
  • Increased debt. Taking out a personal loan to fund a large purchase will add to your debt pile, which means you’ll be paying more every month to cover all your financial obligations. 

Credit Card

Credit cards are another option to finance a big purchase. It allows you to put purchases on credit rather than paying outright and upfront. With it, you can spend up to a specific credit limit that you’ve been previously approved for and any outstanding balances carried over from month to month are charged interest.  

Pros Of Using A Credit Card For A Big Purchase  

  • Convenience. There’s no need to apply for a loan when you’ve already got a credit card in your wallet that you can use to buy an expensive product. 
  • Rewards. If you hold a rewards credit card, you can earn a significant amount of points when you make a big purchase using your credit card. You can later redeem these points for free products and services. 
  • Time to pay off the purchase. With credit cards, you only need to pay the minimum balance in order to remain in good standing. This can be a double-edged sword as it gives you a lot of time to repay the big purchase, but it also charges you a significant amount of interest.  
  • Build credit. If you’re responsible with your credit card payments, you can build a good payment history.  

Cons Of Using A Credit Card For A Big Purchase  

  • High interest rates. Credit cards have notoriously sky-high interest rates, so be prepared to pay a lot in interest if you carry a high balance month after month. That said, you can avoid this cost by paying your credit card balance in full before the due date. 
  • Cycle of debt. If you’re not careful, you can get yourself in a deep pile of credit card debt that can be tough to climb out of, especially when considering the high-interest rate that comes with credit cards. 
  • Lower credit limit. Depending on the credit limit you get approved for with your credit card, it might not be as high as you need it to be to cover a very large expense. 
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Line of Credit

A line of credit works similar to a credit card. It’s a type of loan that offers a specific credit limit from which you can withdraw as much or as little as you need. Like a credit card, you’ll be charged interest on the funds withdrawn rather than the full credit limit. 

Once you repay these funds, you’ll no longer be charged any interest. You can then continue to borrow from the line of credit account any time you wish, and the funds can be used for whatever you see fit. 

Pros Of Using A Line Of Credit For A Big Purchase  

  • Always available. There’s no need to re-apply for a loan every time you need extra cash. Instead, the money is always available when you need it with a line of credit. 
  • Interest only charged on withdrawn funds. Instead of being charged interest on the entire credit limit, you only have to pay interest on the funds withdrawn. 
  • Flexible repayment schedules. You don’t necessarily have to repay the funds to your line of credit via regular installments. Instead, you can choose to pay the minimum until you’re ready to pay more.  

Cons Of Using A Line Of Credit For A Big Purchase   

  • Higher interest rate. Compared to other loan products, the rate that comes with a line of credit might be higher.
  • Temptation to overspend. Since the money is always available to you, it may be tempting to dip into your account and make large purchases from time to time, which will add to your debt load. 

Home Equity Loan

A home equity loan allows homeowners to borrow money against the equity in their homes. Equity is defined as the current market value of a home minus the outstanding mortgage balance. As long as you have at least 20% equity in your home, you may qualify for a home equity loan. 

These unique loan types are typically fixed-rate, which means the interest charged remains stable throughout the loan term. You’ll then be required to make regular installment payments until the loan is repaid in full. 

Pros Of Using A Home Equity Loan For A Big Purchase   

  • Fixed interest rate. Your monthly payments will remain the same because your rate will be fixed over the life of the loan, making it easy to budget. 
  • Lower rates. Since your home acts as collateral for the loan, the interest rate will be lower compared to other borrowing options. 
  • Use the funds for any purpose. There are no restrictions on how you can use the money from your home equity loan. 

Cons Of Using A Home Equity Loan For A Big Purchase   

  • Risk of losing your home. If you fail to make payments on your home equity loan, your home could be repossessed by the lender. 

Buy Now Pay Later

A Buy Now Pay Later program is a type of payment plan that allows you to make a large purchase without having to pay in full upfront. Instead, the total purchase price is broken down at checkout into smaller installment amounts that you pay at regular intervals until the full amount is repaid by a future date. 

Pros Of Using A Buy Now Pay Later Service For A Big Purchase   

  • Convenience. Buy Now Pay Later programs are integrated within the checkout process, so you can make arrangements to finance the product at the point of sale. 
  • Quick and easy approval. It only takes a few minutes to apply for a Buy Now Pay Later program, and approval requirements are pretty flexible and don’t usually require a credit check.
  • No interest. Many Buy Now Pay Later programs may not charge any interest on the amount borrowed but may charge interest on late payments.  

Cons Of Using A Buy Now Pay Later Service For A Big Purchase 

  • Late payment fees. If you’re late on a payment, you’ll be subject to late penalty fees. 
  • Temptation to make expensive purchases. The option to pay for a large purchase at a later date might encourage overspending. 
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How To Apply For A Loan For A Big Purchase

The application process will vary depending on the type of lending program you wish to use. Traditional loan programs require that you provide a variety of personal details about yourself, including your full name, birth date, and address. 

You’ll also be required to answer a few questions about your financial profile, such as your annual income and your job title. The lender may also run a credit check on you to find out what your credit score is. 

It’s important to note that these “hard inquiries” on your credit report will temporarily cause your credit score to dip. That’s why it’s important not to apply for too many loans within a short period of time. 

Is It Better To Finance A Big Purchase Or Save And Pay In Cash?

The answer to this question depends on a few things, as not everyone’s financial situation is the same. What could be right for one person may not be appropriate for another. Consider the following before deciding whether to finance an expensive purchase versus taking the time to save up and pay in cash instead. 

Pay Cash If You Want:

  • To avoid adding extra debt to the pile
  • To avoid having to pay interest on the purchase

Borrow If You Want:

  • To purchase something that is needed urgently
  • To take advantage of a special sale
  • To purchase a product that will appreciate in value over time
  • To build credit

Financing Big Purchases: FAQs

Can I get a loan with bad credit to finance my big purchase?

Yes. There are “bad credit lenders” available who work specifically with borrowers who have sub-par credit profiles. Just be aware that you may pay higher interest as a result of having a lower credit score. 

How much can I borrow for my big purchase?

The amount you can borrow depends on a few factors, including the type of loan you’re applying for, your income relative to your current debt load, and your credit score. 

Is a credit card a good choice for a major purchase? 

Using a credit card to pay for a large purchase may be a good idea if you feel that you can pay off your balance in full by the due date to avoid paying interest. It’s also a convenient option, as you won’t have to apply for a loan. But if you don’t have the funds needed to pay your balance by the next payment cycle, you’ll be stuck paying a lot of interest. 

Where can you get a loan to finance a big purchase?

Loans are available from various sources, including banks, credit unions, and online lenders. 

Final Thoughts

You don’t always need a big bank account to make a large purchase. There are plenty of financing options available to help you get your hands on a must-have product that your wallet might not be enough to handle right away. That said, be sure to consider your ability to repay your loan before you add more debt to your finances.

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