Buying A Home: Difference Between Paying in Cash Vs Loan

Buying A Home: Difference Between Paying in Cash Vs Loan

If you are also planning to buy a house, you could be facing the same dilemma. Every coin has two sides, so does payments in cash and loan
 
Buying A Home: Difference Between Paying in Cash Vs Loan

The importance of buying a home is different for people at different stages of life. To those nearing retirement, the prospect of living a life free of debt feels tempting. On the other hand, empty nesters consider selling their large family homes to shift to smaller accommodations or buy a new one for investment purposes. Similarly, homeowners who have lived in a house for long enough consider investing in a modern home to match the pace of the world around.

Irrespective of their life stage, there is always a dilemma about the mode of payment. Some consider cash to be the best option for buying a home, while others prefer paying a home loan EMI.

If you are also planning to buy a house, you could be facing the same dilemma. Every coin has two sides, so does payments in cash and loan.

Here are the pros and cons of these two payment methods of buying a new house:

  1. Credit History

When you opt to borrow a home loan, you should have a good credit history. Higher credit score usually means quick loan approval and high eligibility. If you don’t have a credit history, a home loan EMI can also help you build it along the way.

In cash payments, you may not require any credit history, nor does it help in building one.

  1. Risk Level

Every payment comes with its set of financial risks. When you take a home loan EMI, you have to plan everything, including your monthly expenses, to avoid financial burden later. Although, you can reduce it by choosing lesser home loan EMIs. Sometimes, you might have to pay penalties for late payments.

On the other hand, cash payments do not have such risks. Since real-estate costs are sky-high, it might be difficult to arrange that amount. For instance, in a metro city in India, the average price of a 2-BHK house can be more than Rs 70 lakhs depending on the location. It may be difficult to arrange a huge amount in cash.

  1. Collateral

When you take a home loan EMI, you may have to submit collateral for securing the interest of your lending bank. However, cash payments do not have any such requirements.

  1. Ownership

When you make a cash payment, after little paperwork, you can become the owner. However, in case of a home loan EMI, it requires a comparatively more paperwork.

Even though you get instant ownership with cash payments, a home loan EMI is a safe option to choose as it will also give you tax benefits and secure your payment process throughout.  

  1. Process Ease

A home purchase in cash comes with a smooth documentation process while taking a home loan EMI is little complicated unless you choose a renowned bank.

Here are some pros and cons of cash payment and home loan:

Home Loan

Pros:

  • With a home loan, EMI helps boost your credit score as repayment is made on time.
  • You can also claim a tax deduction as per government norms on the interest rate and principal amount.
  • It also saves you more money for an emergency as repayment is made in instalments.
  • You can get an idea of the approximate values of interest rate, principal amount, and loan tenure by using a home loan EMI calculator.

Cons:

  • There is a strict eligibility criterion, which includes the credit score.
  • Penalties may be imposed for failure of on-time instalment repayment.

Cash Payment

Pros:

  • No monthly instalments
  • No credit history required for purchase
  • No rate of interest charged above the principal

Cons:

  • Difficult to arrange a significant amount in cash
  • May cause a financial burden in some cases, where the value of the property is sky-high
  • May lead to insufficient emergency funds
  • If the money is being taken out from a bank account, the activity might seem suspicious to the authorities

The ultimate choice between these two payment modes must be based on your affordability. If you prefer opting for a home loan, make sure you select a renowned bank like Axis Bank whose home loan application process is quite simple.

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