Cash Payment or Home Loan – Which Option is Better?

Buying a home is a significant financial decision, and therefore, it must not be made in haste. You must conduct extensive research about different properties before making the decision.

A dilemma often faced is whether to pay in cash or apply for a loan to buy the home. Before making a choice, it will be beneficial to understand the pros and cons of both these options.

Paying with cash

Developers often prefer this option because they receive the money instantly. In comparison, lenders may take some time before they disburse the home loan amount. Here are the benefits and disadvantages of making the payment in cash.

Pros

1. Credit history not required

When you apply for a loan, the lenders consider your credit history. However, you may not have a credit history or may have a lower credit score. In such a situation, availing of a housing loan may be difficult, and paying in cash is a better option.

2. Negotiation power

When you are willing to pay the entire property price in cash, you can negotiate a better deal. There are no issues due to any delays in the disbursement of the home loan amount. The entire transaction is completed quickly, which provides you with better negotiation power.

3. No debt

You enjoy peace of mind when you do not have to worry about paying the equated monthly installments (EMIs). Furthermore, if something untoward happens to you, your family will not have to carry the financial burden of repaying the loan promptly, thus ensuring their financial security.

Cons

1. Inadequate funds

It is most likely that you do not have the entire amount needed to purchase your dream home. Therefore, this inadequacy of funds needs to be overcome, and a loan is the most beneficial option.

2. Compromise

If you purchase your home with cash, you may have to compromise on other things. This may be not able to afford the car you want to buy or not take your dream vacation.

Home loans

Most people use a home loan to buy their dream house. Although your home will be mortgaged to the lender, choosing a loan has certain advantages and disadvantages, as discussed below.

Advantages

1. Affordable interest

Contrary to popular belief, the home loan interest rates are not very high. Furthermore, you may repay the loan over many years. This ensures you face no financial difficulty in making a timely payment.

2. Tax deductions

Section 80C of the Income Tax Act, 1961, offers tax benefits on your loan of up to INR 1.5 lakh per annum. In addition, you are eligible for deductions on the interest paid under section 24(b) of the Income Tax Act, 1961.

Disadvantages

1. Approval

There are several reasons why your home loan application may not be approved. Some of these include lack of credit history, employment history, or insufficient repayment capability. This may make it difficult for you to use a loan to pay for your house.

2. Higher expenses

It is most likely that you opt for a long duration when applying for the loan. As a result, you may have to pay a significantly higher interest cost over the entire loan duration. Furthermore, longer tenure means you do not receive clear ownership until the real money is repaid, which is not give you peace of mind.

Several factors play an essential role when you choose between cash payment and a loan. It is recommended that you analyze the various factors to determine the most suitable option for the long run.