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I live in France where credit cards are less widespread than in the U.S. The default account for us is a checking account. Often you can't spend more than what is in your account; otherwise you have to pay the money back with a huge interest (16% or so).

I never took a loan or used a credit card, and I always pay cash at once for everything I buy. If I want something expensive, I save monthly until I can afford it.

I know I will probably need to do a loan to buy a house one day, but I am saving so that I will be able to provide a substantial amount first. I am considering buying a car and I will probably take a cheap one in order to pay for it completely.

I wonder if this is a good practice. Am I missing good opportunities by not using the credit system?

In which situations is it better to consider a loan instead of paying cash?

Octoplus
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4 Answers4

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Your practice of waiting until you can pay cash is a good one. It will certainly prevent you from getting into debt!

Now, to be clear, your question puts a credit card in the same category as a loan, but it doesn't have to be. You could use a credit card almost like cash, if you are careful.

I'm not familiar with the system in France, but in the US, even if you are paying cash all the time, there are some benefits to getting a credit card and paying it off in full every month, instead of simply paying with cash. Some of those benefits are:

  • You get to wait 20-30 days before paying for the items.
  • You will start to build a credit history, which in the US is helpful when you want to borrow money in the future. [Note: The concept of credit building currently doesn't exist in France. Thank you @Relaxed for mentioning it.]
  • You don't have to carry as much cash around with you. If you lose your wallet you can cancel your credit card and get a new number.
  • Some credit cards allow you to earn "points", "airline miles", or even cash back on every purchase. Typically the value of these incentives ranges from 1-2% of the purchase price and it is basically free money (when compared to paying cash). [Thank you @apsillers for reminding me of this.]

One pretty big downside of having a credit card depends on your personality. Some people, once they have credit, end up spending beyond their means, and end up getting into debt.

Please look into whether credit cards work the same way in France before considering the above advice.

As for your question regarding getting a loan vs paying cash, that will usually be personal preference, since with a loan you can buy expensive items (such as a house or car) much sooner than you otherwise could if you waited until you saved the money. For example, it might take 10 years or more to build up enough money to purchase a house with cash, so if you don't want to wait that long, you'll need to finance it.

TTT
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A loan with modest interest is better than paying by cash if there are better alternatives for investment. For example, suppose you are buying a house. Consider two extremes: a) you pay the house entirely by cash, b) the entire buy is financed by the bank.

Historically, real (subtracting inflation) house prices (at least in the U.S.) have not risen at all in the long run, and investing all of your own capital in this way may not be optimal.

Notice that we are looking at a situation where one is buying a house and living in it in any case. Rent savings are equal in cases a) and b). If instead you were buying a house not for yourself, but as a separate investment for renting out, then you would receive rent.

In the case a), the real return on your capital will be zero, whereas in case b), you can invest the cash in e.g. the stock market and get, on average, 7% (the stock market has yielded a 7% real return annually including dividends) annually minus the bank's interest rate. If the interest is lower than 7%, it may be profitable to take the loan. Of course, the final decision depends on your risk preferences.

mark3292
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Following are the situation in which it's better to consider a loan instead of paying cash

  1. Consolidate Credit Cards
  2. Pay for a Wedding
  3. Emergency Home Repairs
  4. Paying Medical Bills

Some loans are earmarked for a specific purchase. You buy a home with a mortgage loan, you purchase a car with an auto loan and you pay for a college with a student loan.

Personal Loans can be used for just about anything, given the right circumstances. For example, most people can't afford to pay cash for a home, making a mortgage loan a necessity.

Hardika Jain
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If it were a lesser purchase, it would be more feasible to buy with a credit card. But in my experience, a car would be more advantageous to be bought with cash simply for the "ease" and out of undue bureaucracy related to extrapolating credit card accounts, since interest is not a pleasant thing to pay.

Victoria costa
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