Big purchases are something everyone faces eventually. However, few people have enough money sitting around to pay for expensive items. Their money generally goes towards paying day-to-day expenses.
That’s why it is not surprising that a hefty price tag for an item can lead to anxiety. You might not have a clue how you’re going to pay for it. Plus, you may not know whether one particular method is better than other when you decide to make big purchases.
Luckily, there are many things you can do to prepare for a big purchase. Let’s start by defining what “big” is and what kinds of things that can involve.
What are Big Purchases?
For the sake of this article we are defining a big purchase as buying something that takes more than a few months wages to pay for.
Common examples of this include buying a house, car, boat or another costly item. Big purchases can also include things like paying for an expensive vacation, a significant home renovation, a wedding, or even a cosmetic medical procedure. All these purchases either require a large sum of money upfront or they are impractical to buy without financing.
Questions to Consider Before Buying
So, if you’re wondering whether you should buy something the number one question should be, “Do I really need it?”. Are you trying to put a roof over your family’s head? Do you need to buy a car to get to work? Are you renovating to increase the value of your property?
If the item isn’t something that you need, that doesn’t mean you can’t buy it. You just need to take a very close look at whether you can afford it. Review your finances to see whether your budget can support the potential monthly payments.
You can do a quick and easy calculation using the 50-30-20 rule. You should put 50% of your money toward needs, 30% toward wants, and 20% toward savings. If you can’t work your big purchase into these numbers, you may need to rethink the idea.
If you’ve decided that you need an item and you can afford it, you should also ask yourself whether you need it right now. After all, waiting can often benefit you in many ways. As an example, buying a new car when it is on sale could save you thousands of dollars. Waiting to buy a house could give you more time to save up a larger down payment which reduces your debt load.
Finally, have you researched the item and weighed the pros and cons? Emotional buying is a common problem, but thoroughly investigating a buy beforehand can eliminate this issue.
For instance, buying a house is appealing since you have a home. It is also an investment that hopefully increases in value over time. However, you also need to take into account the maintenance costs associated with a home. There can also be many fees involved such as lawyers fees, closing costs, insurance, and more. Plus, the market price may not increase so an increase in asset value isn’t guaranteed.
Other big purchases can be examined in the same way. Look at the pros and cons in a detached manner, rather than letting emotions cloud your judgement.
Plan for Big Purchases
Many people can access credit easily. While that’s great, it is also a double-edged sword since credit can be easily abused. That why it makes perfect sense to plan before you buy.
Take the time to consider whether you really need the item, or it is just an impulse. Impulsive buying can lead to too much debt. The effects of carrying debt can be far reaching and very powerful.
Regrettably, statistics show many Americans are spending less of their income to pay off their debt, yet they’re taking on more. Don’t take on debt unless you’ve really thought about the consequences.
Optimize Your Credit Reports & Scores
Many big purchases include financing, because you do not have the cash to buy these items outright. This usually means that your credit plays a role.
Yes, you can get a loan even if you have less than perfect credit. Still, you’ll want to get the lowest possible interest rate, because every percentage point can amount to you paying thousands of extra dollars.
Get your free copies of your credit reports from all three credit reporting agencies. Check for errors and fix them before you apply for financing. Also take a look at your credit scores for any obvious problems. Even marginal changes can improve your chances of getting a lower interest rate.
Lower Your DTI
Your debt-to-income ratio measures what you owe against what you earn. Calculate yours and get it as low as possible before you apply for financing. If you are carrying too much debt, lenders may consider you too risky for more credit.
Review Your Borrowing Options
Your choices will largely depend on what you’re buying and your financial situation. Generally, the very best credit products are reserved for those with top-notch credit, a steady income, or many assets. Luckily, that doesn’t mean you can’t get a great deal, even if you don’t fall into this category.
Buying a home usually involves getting a mortgage. However, buying almost anything else usually involves obtaining a personal loan. Fortunately, there are actually smart ways to use a personal loan that can benefit you greatly. As an example, home renovations can increase the value of your asset and earn you more money when you sell.
Still, every lender differs, as do their offerings. This means it is very important that you compare them to find what works best for you. However, you need to go about this in the right way. Otherwise, it will impact your credit scores.
We’ve mentioned a personal loan since they offer many advantages. First, it has a set interest rate and equal monthly payments. Next, you are charged simple interest which means interest does not accumulate on the unpaid balance. Instead, the amount of interest charged is divided equally between your payments. Every payment you make goes towards interest and reducing the principal amount you owe.
You have countless choices when it comes to personal loans. Apply online or in-person, back the loan with collateral or not, qualify based on your income, or rely on your credit alone. We discuss more about how to easily compare installment loans and lenders later in the article.
Don’t Use Credit Cards for Big Purchases
You may have noticed that we did not mention credit cards as an option for big purchases. That’s because it isn’t generally a good idea to use them.
Why? Credit cards charge compound interest. Unless you pay off your credit card in full, the creditor tacks interest onto the unpaid balance. Next month, you pay interest on this higher balance which already includes interest. This compounding effect makes it very hard to pay off big purchases on a credit card.
Plus, the interest rate on most credit cards is almost always much higher than other borrowing options. Adding big purchases into the mix is a recipe for disaster especially considering the average interest rate on a credit card is 28.72%. In other words, you’ll pay almost a third more for big purchases using a credit card. Perhaps that is why credit card delinquencies are now as high as they were during the 2008 financial crash.
Compare Terms & Lenders
One of the easiest ways to compare offerings for big purchases is by using a loan broker with a pre-approval process. You fill out one application form and the broker assesses your information and sends it to appropriate lenders.
This not only does a lot of legwork for you, but also eliminates lenders that don’t have what you need. Plus, the process does not affect your credit. You’re shown what each interested lender has to offer so that you can quickly and easily choose the best.
Besides comparing products, you’ll also want to check out lenders. Run prospective ones through websites such as TrustPilot that offer independent reviews from a variety of borrowers. You’ll get far more useful information on their customer service, loans, and more than you would from a general search.
When you’re doing your comparisons, don’t forget to look at fees. Some lenders are fee-free and accept additional payments at any time. Others charge an origination fee for setting up your account and prepayment penalties if you want to pay more than your scheduled payments.
FlexMoney Can Help You Make Big Purchases
Making big purchases is always exciting. However, choosing the right loan and lender is often stressful. Luckily, that needn’t be the case when you choose FlexMoney USA.
We offer access to a network of reputable U.S. lenders offering loans ranging between $200 and $35,000. The process is easy and safe and the best way to check what’s available to you in minutes, without lowering your credit scores.
These loans are flexible, convenient, and have fixed payments, but no unnecessary fees. Use a personal loan to pay unexpected costs, expenses, or to consolidate debt. Just complete one application form and we’ll find the most suitable lenders for your needs. Get a personal loan now, quickly and easily.