Purchasing a home requires much planning, and how you fund your purchase is often the most significant consideration. There are two main ways of financing your home, pay in cash or fund your home using a home loan. After demonetisation, arranging for enough cash could be tough, but if you have funds, knowing the pros and cons of cash payment against taking a home loan can help you make a smarter decision. Here’s how these two options vary.
1. Requirement for credit history
Borrowing a home loan requires you to have a good credit history. The higher your credit score, the higher are your chances of receiving quicker approvals and lower home loan interest rates. However, it is also important to note that if you don’t have a credit history, a home loan can help you build your credit history.
On the other hand, cash payments, do not contribute to your credit rating in any way or require you to have a credit history.
2. The level of risk
Borrowing any loan comes with a level of financial risk. The same applies to a home loan. However, planning your finances for repayment can make the process more convenient. Also, with NBFCs offering home loans, you have access to various flexible loan options. Bajaj Finserv, for example, offers you a home loan that can help you choose a flexible tenor up to 40 years for easy repayment and allows prepayment and foreclosure at no charge. Apart from that, it also offers you other benefits like a 3 EMI holiday, a top-up loan, and competitive interest rates.
3. Requirement of collateral
Most home loans require you to pledge your new property as collateral to secure the lender's interests for providing you with a big sum of money. Cash payments, however, do not require any collateral, so your home is not at risk.
4. Immediate ownership
Both a home loan and cash payments can help you become a homeowner instantly. However, it is important to note that cash payments can provide you with a sense of freedom after purchasing your home. The home loan can do the same as long as it's flexible and makes repayment convenient for you.
5. Paperwork and procedures
Making a home purchase with cash comes with very few procedures or paperwork. All you have to do is pay the money upfront and pay all the fees like registration and stamp duty. However, applying for a home loan requires you to go through an application procedure and verify your documents before the loan is approved.
These five factors differentiate a cash purchase from a home loan. An easy way to decide between the two is to weigh the advantages and disadvantages of both. Here’s how you can arrive at a sound conclusion based on your finances.
Benefits of a home loan
Taking a home loan to purchase your dream home can help you boost your credit score. It is, of course, when you repay your home loan in a timely fashion. You can also claim tax deductions on your home loan repayment, both in repaying the principal and paying the applicable interest. Taking a home loan also leaves you with more liquidity of cash and savings that you can access during emergencies and times of need. So, to check if you can afford it, calculate your home loan expenses in advance with a Home Loan EMI Calculator.
Disadvantages of a home loan
Home loan interest rates, especially when high, can increase your monthly cash outflow. You can also incur fines and penalties for missing out on EMIs. Long tenor loans can be heavy on your pocket as it means you will be paying more interest. The eligibility criteria may be stringent, and a rejected application can negatively affect your credit score. Use a Home Loan Eligibility Calculator to avoid risks of rejection.
Benefits of cash payments
Apart from the joy of buying a home without being in debt, you can also benefit from sole ownership of your property. As you are not paying off a home loan, a lender does not have any right over your property. You also don’t need to have a credit history in order to purchase a home in cash. It means you do not need to make efforts to build a good credit score. You also save money as your cash payment means you do not need to pay any interest. In addition to this, you can also negotiate on the home’s price with the seller if you have the cash in hand to pay them. Furthermore, your family can benefit too. Your family members do not need to worry about paying off a home loan in case of your demise.
Disadvantages of cash payments
A home purchase comes with a heavy price tag. Therefore, investing this amount of liquid funds can cause you to experience a cash crunch. Moreover, even if you have sufficient funds, for the time being, any emergency in the future may cause you not to have enough saved up for easy resolution. So, consider a cash payment only if you have more money in the bank that you can access immediately to meet exigencies.
Now that you are aware of both finance options' pros and cons select and become a homeowner.
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