Loan or Full Payment

I believe many of you would agree with me if I say that we are currently living in “loan” economy. You can buy almost everything using loan nowadays: house, car, computers and even insurance. I am perfectly fine with taking a house loan or car loan because of the large amount of capital needed to buy them. But, a loan to buy computer or insurance, I find that too much.

I have never been a fan of loans because of 2 main reasons. Firstly, taking a loan to purchase a good or service means that you will not be using the money in your pockets or in your savings. And usually give the false impression that you still have a lot of cash to spare and hence more buying spree. For some people, it results in spending beyond their earnings. Secondly, I don’t like the feeling of owing others money. I don’t like the feeling of seeing a certain sum of money in my savings, knowing full well that a certain percentage of it does not really belong to me. When I buy something, I prefer paying in full although that will probably result in a certain proportion of my savings disappearing. I find comfort in knowing that even though I am poorer by a certain amount, the remaining is mine and not others.

Having shared my preference with others, I have to admit that some of them do have a point for taking a loan to purchase something instead of paying in full. Loan allows you to invest your cash and savings somewhere else to yield a return that is much higher than the interest rate of the loan itself. That way, you have earned yourselves a certain amount of money which you would not be able to if you have paid for the good in full. The advent of 0% interest rate loan has enticed more people to take loan because now they don’t even need to worry whether their investment somewhere will yield return above the interest rate of the loan or not (Any return above 0% is good enough.)

My advice: take a loan only if you are 1) highly disciplined (will not act on false impression that you still have lots of cash) and 2) okay with the feeling that a certain proportion of your cash actually doesn’t belong to you. If you don’t have both, in particular the first one, then join me.