What Would You Do? Pay Cash And Drain Savings, Or Use Interest Free Financing?
For the past year, my wife and I have contemplated doing some major home improvement/maintenance projects. New carpeting, painting, new furniture, and replacing our air conditioner have all been discussed and investigated. I recently painted our main living room (which turned out great!), but we haven’t pulled the trigger on any of the other items. We have been indecisive as to which one should be the highest priority, until yesterday.
We agreed that replacing our air conditioner before it fails should be the highest priority.
With several estimates in hand, we selected a dealer based upon price, customer service, and reputation. Talking to the representative to setup an installation date, he asked us if we would be interested in taking advantage of their financing option. The details of the offer are:
- Financing term is 24 months
- Advertised as, “same as cashâ€, interest free financing
- $25 one time origination fee
We have the ability to pay for the air conditioner with cash, but it would drain our emergency fund. I thought it would be worth my wife and I discussing taking advantage of the offer.
Upside
- No interest
- Forced monthly payment (to ensure it IS paid off in 24 months)
- Affordable monthly payment (about $120 a month)
- Savings not drained, funds still available for unexpected expenses
- Could potentially use some of the funds for some new furniture
Downside
- $25 origination fee
- While the monthly payment is affordable, it still is $120 out of our budget each month
- If we use some funds to purchase furniture, are we overspending?
Analysis
By taking advantage of the financing option, we retain our ability to handle unexpected expenses and all it really costs us is the $25 origination fee. The monthly payment does fit into our budget. However, I’m always concerned with financing things – especially when we have the cash to pay for it outright. Will it cause us to overspend? Is it really considered overspending if we take advantage of interest free financing for our air conditioner, use some of our savings for furniture, and still be well equipped to handle unexpected expenses?
What do you think, Clever Friends, should I just pay cash for our new air conditioner, or should I take advantage of the interest free financing?
Brought to you courtesy of Brock
The numbers obviously say interest free financing because of the interest rate arbitrage… But it really depends on the person.
You can usually finance a whole lot more than you can actually spend, since financing is based off of income and not off of savings. So, people have a tendency to spend more. Then finance another project later before the first one isn’t paid off.
Even if a person could, in theory, keep the difference and earn interest on it, thus becoming wealthier by borrowing…. in practice almost nobody actually does that.
Exactly, Eric……and then fall into credit card debt and end up paying interest for years….
I always hate draining my emergency fund. I would go with the financing with the idea that I could always make a large payment and finish it off at any time. Oh, unless they would penalize you for paying in advance. I would make sure to find that out before making a decision.
That’s a great question, Amy….although I’ve never encountered any kind of financing that penalized for early payment.
I agree with previous poster that you should check and see if there is any penalty for paying it off sooner than the 24 months.
Definitely a great question to ask, Ken. Thanks for stopping by!