What are your thoughts on when it comes to the finance of major and minor purchases? Should you get a loan? Should you carry a balance on your credit card from one month to the next?
In this episode of Using Your Power, David Andrew Wiebe and Maveen Kaura explore the upsides and downsides of financing.
I Will Teach You To Be Rich by Ramit Sethi
- 00:00 – Audible book recommendation
- 00:36 – Introduction
- 01:06 – Financing helps you build credit
- 01:21 – High interest rates
- 01:47 – Collect points
- 01:59 – Monthly payment schedule
- 02:43 – Instant gratification
- 03:21 – Product loses value over time
- 04:01 – Would be hard to purchase certain products without financing
- 04:33 – Purchase products within your current budget
- 06:59 – Products/services not protected with cash vs. credit card
- 08:35 – Knowing your audience as the seller of the product/service
- 10:15 – Consider why you are going to finance your purchase
- 12:22 – Find ways to leverage money
- 13:55 – David’s summary
- 14:46 – Maveen’s summary
- 15:37 – Outro
Maveen: Hi! Welcome to Using Your Power. This is Maveen Kaura.
David: And this is David Andrew Wiebe.
Maveen: David Andrew Wiebe, how are you doing?
David: I’m powered up man. How are you?
Maveen: I’m excited. We’ve got a new format that we’re going to kind of test out. We’re going to try to take our shows down from about an hour, and sometimes even 80 minutes…
David: And change.
Maveen: And try to bring it down to about 15 to 20. You know if we got to go a little longer, about 30-minute time frame, that’s okay. We’re going to try to still bring the best information to the listener.
David: Yeah. All you guys are aware of that, that’s what we’re going to do.
I’m just going to get right into my first point. I’m debating for financing and I’m going to say the first thing it does is it helps you build credit and that allows you to make bigger purchases later such as a home or a car. It makes it much easier to get a mortgage or a loan when you need it.
Maveen: Right. So, I’m going to be taking the other stance, so I’m going to be debating against financing.
Although one can borrow money, that’s not a problem, but you do have to usually pay anywhere between .99% if you’re buying a brand-new car off the lot to anywhere between 8% if you’re buying say a used car as an example. So just to give you an idea, you can end up paying quite a bit of money in interest over time.
David: But the flip side of that is that you can actually earn a lot of points, and then you can use those points for travel and sometimes other products and so you get a lot of bonuses along with financing different products.
Maveen: You can get definitely some points. I think we’ve talked about that on a previous episode so. I mean there are some benefits there. Even if you are buying on credit card for example, the example I have here is you do have to commit to monthly payment schedule, something I know we’ve talked about offline here.
We talked about not wanting to necessarily commit to that because sometimes life does change and if you’re committing to a say a 36-month or an 84-month time frame, say for example if you’re buying a vehicle, then you’re saying to the company no problem, I’m going to be able to make payments to you monthly, month after month after month for 84 months on something that may not be valued at that at the end of it.
David: I can see that but what about instant gratification? What about the ability to buy what you want and be able to do what you want right now on funds that you’d be owing later but you won’t be owing immediately?
You can always pay back later depending on the credit card agreement. I mean some of them do have you pay off your entire balance every month but most of them don’t, and you’re able to finance that over the long term and not have to pay for it immediately.
Maveen: Well, absolutely. You can definitely take some money and finance anything you want for immediate gratification. I think a lot of people do in society. If you’re able to pay that off within that 30 days, absolutely not a problem but unfortunately a lot of people do not and they live on the interest right, which is what we mentioned earlier.
I kind of used my examples as a car. Looks like you’ve gone the credit card route so we’re definitely going to be giving two different examples.
One of the things I look at was well, you can… If you’re buying a vehicle as an example, and you were deciding to not finance it, which is a good thing because when you buy a vehicle and you do finance it, typically as soon as you drive that vehicle off the lot you’re going to lose 20% and now you’re making those monthly payments, for example 36-month or 86-months loan payments on a vehicle that’s worth 20% less than what it was valued at before you drove it off the car lot.
So, the loan that you have you are actually paying more money on it so that’s one reason I wouldn’t finance.
David: But it’s really hard to get new products then. Like if you don’t have the funding to be able to buy a brand-new car ,which could be $10,000, $20,000, $30,000, it would be even more for like a better car, a more expensive car. Then if you must, you have that money saved, you can’t just buy that money off – buy that car off the lot.
So, what else are you going to do? I mean credit cards allow you to get, I mean loans even allow you to get products that are brand new and that are relevant now versus products that are old and that you don’t need later.
Maveen: Well, maybe I’ll consider you to think about not financing and maybe buying a car that’s something within your budget, right? I know a lot of people can usually typically have $2,000 to anywhere between $10,000 in the bank, maybe a little safety net, where they say something ever happens to my car, my house or whatever I have a little bit of money to throw at that, right?
So, I would consider buying a car that say somewhere between $2,000 – $10,000 range and here’s the reason why.
One, you have negotiating power when you have cash. You walk in to a car dealership where your car is 30 – 50 – $60,000 you don’t really have negotiation power, the dealership does. You walk into an ad for example, Kijiji or Craigslist or whatnot, Auto Trader, you go talk to one of those guys you have $10,000 cash with you, you have a little bit of negotiating power because people want your cash, right?
They then don’t have to deposit it to a bank account. They don’t have to really show where it came from so it ends up being a benefit for them. But when you turn around to sell that car, let’s say 2 to 3 years from now, that car that you bought for let’s say $10,000 hasn’t depreciated in value as much as a car that cost you $20,000, $30,000, $40,000, $50,000, $60,000 only because you wanted something new and instant gratification.
David: What about the quality of the product though? Because you might not get what you’re looking for and even if you do buy a $2,000 to $10,000 car, there’s nothing saying that car won’t break down within a year, even less than that, so then you end up paying more in maintenance and repair fees.
Maveen: Well, you’re probably right in that one but you can get around that, right? I mean before you buy a car, do it with a mechanic. So, spend a little extra money to buy a car that’s not a lemon, you can find alternative ways to not finance so you can save yourself one on the fixing of the vehicle, right?
Now, there are some things that you will have to do. If the car is over I believe a certain age like 10 years or something like that, 12 years you do have to do certain inspections anyways. So, sometimes it works in your benefit because you pay for an inspection or you can actually work it into the deal when you’re buying the car off whoever you buy it from and say, “Hey, I want inspection included in this purchase” and then you can kind of find out if the breaks have been done or how much is left in the breaks or you know same as credit cards, right?
I know you’re talking about buying the newest, nicest thing and sometimes we all want that but again I think one of the talks that we’re going to do about celebrities here in the next little while is kind of that get into that a little bit in more detail but… If you can’t afford to buy something because your pay grade is not there yet, increase your pay grade and then go buy what you want.
David: Yeah. I mean one thing about buying things in cash though is that you don’t necessarily get the same protection that you would with buying things with a credit card.
I mean you get insurance so you can get car insurance and things like that but you can also get insurance and protection on your credit card in case you can’t make payments and things like that, so when things are difficult, your credit card company would sometimes handle some of that for you.
Maveen: Well, that is true. There are options there. Again, if you are using the credit card to make a purchase but then paying off that purchase within the allowed 30 days then you are actually maximizing the way you can use your credit and the credit that’s available to you because this is in essence free money that people are giving to you.
But there are a lot of different things as well. A lot of people I know say, “I’m not going to bother with collecting points” or you know it’s not a big deal but there are certain things.
You’re right, if you’re booking travel you have to book on a credit card. You cannot book travel without a credit card, right? But again, the idea is not to finance your trip, the idea is to have enough cash in the bank to pay for that trip so don’t take a trip before you can afford to take the trip.
David: But of course, that could build your credit and then enable you to make bigger purchases down the line so there is that side of things too.
Maveen: Yes. You can definitely buy stuff on credit and build your credit score but when you pay and you, don’t pay off your credit card at the end of those 30 days after 30 day after 30 days. You actually negatively impact your score as well.
So, you do want to continue to pay those 30 day installments as well? You don’t want to hold the balance where now you’re paying interest to credit card companies. We’re talking 18 – 20% interest not that .99% to 8%.
David: Here’s something that’s a little bit outside the box. I think credit is partly knowing your audience. I think companies that we have locally, a company called Long & McQuade which supplies instruments and musical gear for musicians, I think they know their audience well because they will give a financing plan or they’ll give a loan to just about anyone.
You can finance anything in that store over the long haul. Make smaller payments instead of one huge lump sum payment that most musicians wouldn’t be able to do and then have a piece of gear that they want right now and be able to do the work that they want to do right now.
Maveen: Right. In most cases, you’re right. In this case I think you would be right where say if you’re a musician but you’re serious about being a musician not just starting out as a hobby and you take out say $10,000 finance loan to buy a whole bunch of equipment and set up a whole studio and now you’re actually setting up as a business that could be a good idea because now you have clients coming in recording in your studio and they are paying the payments potentially.
But keep in mind, if you’re just doing it for yourself, it’s just a hobby, you buy $10,000 worth of equipment, you’re now paying interest to somebody based on a purchase that you made on equipment that could still break, it could still go bad, maybe you want to sell it and you’re not going to get as much as you pay for it in the big picture too, right?
So, you have to look at all those things. Again, when you’re paying interest on something, again you’re paying interest on money that’s not real and you have to actually go and work for that money to pay somebody else that they are really just making for free.
David: You’re right though it is about the long-term view. If you can have a long-term view of what you’re going to do with your money and it can generate cash flow positive for you whether it’s a business or freelancing thing or some other endeavor or event that you’re putting on, then financing in a short term might actually bring you more money rather than taking the risk of not having you know invested in that thing at all.
Maveen: That’s right. So, you have to really just look at it. Is it a smart business sense or are you doing it because it’s a quick fix gratification thing? If it’s quick fix and gratification, I’d say don’t finance. But if it’s something that’s going to add some value to your business or help you grow somehow, definitely look at it. You don’t necessarily have to finance the whole amount. You can potentially finance a smaller portion, right?
I know when I was working in the home industry, a lot of people would come in and they’ll only do the minimum 5% but then they’d end up paying on top of that mortgage fees on top of that which could add up to anywhere between $15 – $18,000 again depending on what it was, so you’re paying an additional interest payment on top of that, or in this case an insurance payment on top of that, but if you were able to save a little bit more money and in this case a lot of money because 20% is quite a bit, you’ll have a better chance not to have to pay that $18,000 in addition, right?
If you are making the purchases at the right time then I think you could really find ways to work.
David: Ultimately, I don’t think there is a really great argument against the interest fees that you’re going to pay. Certainly, you can build your credit, certainly you can earn points, certainly you can get instant gratification but it’s really hard to argue the point that you end up paying more for the products that you could have been spending less on.By financing, you could end up spending more on products that will be worth less. Click To Tweet
Maveen: Right. And I mean just to give you an idea on the flip side, right? So, if I own a business and I’m buying stuff on credit, absolutely you know? If I can have the ability to write off an expense and I can write off those expenses or if I’m in a business that I need to show a loss and having interest payment could be a way to show loss potentially as long as your accountant obviously says it’s not funny accounting, right?
We want to ensure against that but I mean it’s possible it could be a business strategy as well to make a payment on those because you’re trying to build credit like you said with a supplier so that maybe something, right?
And sometimes I know if you’re buying things, especially if it’s B2B sometimes you do have the ability to get a 60-day notice, a 90-day credit note before any payments had to be made or even before interest payments are even starting, right? So, sometimes they’ll give you even longer than 30 days to make the full payment so you’re not having to feel like you’re trying to catch up on payments.
David: Also, another thing is just leverage. I think that’s the word that some entrepreneurs hate but you can get a lot of leverage. There is a lot of funding sources that are available. It’s not just credit cards. There’s loans. There’s hard money loans. There are so many different ways for you and you probably don’t even know about them.
There is probably even dozens of ways that you can get money without putting any money upfront. As long as that money is being used towards a project or a business or like a home refinishing or remodel then your business is liable or the house that you bought is liable. You are no longer liable for those loans or that debt which is one way to leverage money that I even heard entrepreneurs talk about.
Maveen: Absolutely. One of the things David too is I know a lot of times – a couple of years back when the home financial crises kind of happened there, a lot of people knew exactly what they are doing, right? They weren’t really financing their home. People are just using their name as a financing signature saying you know what I’d say for example partner up with you and you go like, “Hey no worries Mav, I’ll take care of everything for you. Put your name down.” And I didn’t have to do anything. I didn’t have to put any monthly payments down so there was a way for me to get $5,000 or something like that at the end of six months because you’d be able to take my name off the house and put it under your company name or your trust company but what was sort of happening was a lot of people are doing this and they sort of get into trouble, right?
So that’s one thing I would say not financing and using your name to finance somebody else’s project could sometimes be a better idea because it can put you into some hot water if you don’t know who you are partnering up with and what’s going to happen if something does like happen like a financial crises.
David: Yeah, no kidding. Do you have any other points there Mav?
Maveen: You know what? I think that was a great talk. We kept it close to 13 minutes, that’s pretty good.
David: That’s amazing. Yeah. That’s not bad at all.
Maveen: Cool. Do you have any final thoughts?
David: Yeah, I sure do. I think ultimately, we’re not telling you to finance or not to finance, that’s something that you got to decide on a case by case basis. I think we present some of the points as to why you might want to and why you might not want to.
I think being debt free is really the strongest position of all. Being cash positive is the strongest position of all. That’s the one that we should all aspire to and want to do as business people but sometimes you can leverage credit.
I think you have to be super careful and get to know what you’re doing or else you will just go into debt but you can sometimes leverage other sources of funding to build your business or career.
Maveen: Absolutely, just coming from the banking industry, we worked in banks for six years and I’ve seen lot of different bank accounts and I’ve seen bank accounts with money and I’ve seen bank accounts with no money in it. I mean the people I always try to ask them, I was in my 20s and say “Hey, how did you build so much cash in your account?” A lot of them are business, and again in Alberta a lot of them are oil companies as well working downtown and just being able to see how they were using their money and what they were actually financing, what they weren’t financing through the business loans and how much money they are actually borrowing from the banks because you know the banks obviously want to do business with you as well, and they want to see you grow because they know the more money you keep borrowing the more interest they will keep making as well on those payments.
I think if you are going to borrow money in my opinion is make sure you have a plan, make sure you understand how you’re going to pay that payment back and if it’s an installment or what kind of installments, how much interest you’re paying sometimes – on .99% for example, I know when I bought my car it was .99% and realistically over a three-year period only 300 interest payment, but I was able to write that interest payment off because I had my own business.If you're going to borrow money, have a plan. Click To Tweet
David: Great points. So you’ve been listening to Using Your Power. You can find us at usingyourpower.com. Leave a comment or send us a message. You can also download our course while you’re there and if you’re on YouTube you can also leave a comment and let us know what you think.
Maveen: Awesome man.
David: All right.