To Rent or Borrow to Buy?

Question:  Buying on credit is just like renting?  Better to rent and save to buy with cash to mitigate interest rate risk , depreciating assets and what else?

Answer:  Buying on credit and renting have similarities, but there are differences. When you buy on credit, you take ownership of the asset eventually, whereas renting typically involves temporary use without ownership. Renting allows flexibility, avoiding interest and potential depreciation concerns. Saving to buy with cash mitigates interest costs, depreciation worries, and fosters financial discipline, but it might limit immediate access to certain assets.

Question:  If you extend yourself and the asset depreciates and you lose it, that is a worse outcome?

Answer:  Absolutely, stretching yourself financially to buy an asset on credit carries risks, especially if the asset depreciates rapidly or you face unexpected financial challenges. If the value of the asset drops significantly, you might end up owing more than the asset is worth. This scenario, known as being "underwater" on a loan, can lead to financial strain and potential loss.

Question:  You also put your trust and faith into other people and your environment

Answer:  Indeed, when you buy on credit, you entrust lenders, economic conditions, and external factors that can influence your financial situation. Economic downturns or changes in personal circumstances may impact your ability to meet repayment obligations. Trusting in a stable environment and having faith in your financial decisions is essential. It's wise to be aware of external factors and maintain a financial plan that can adapt to unforeseen challenges.

Question: What challenges are not unforseen?

Answer: While some challenges are predictable to a certain extent, life is inherently unpredictable, and certain events may be hard to foresee with precision. Common challenges like job loss, health issues, and economic fluctuations can be anticipated to some degree, but their specific timing and severity can be unpredictable. Additionally, unexpected events such as natural disasters or geopolitical changes are often challenging to foresee accurately.

Question:  Paying cash averts these risks?

Answer: Paying with cash can mitigate certain risks associated with credit, as you avoid interest costs and the potential for being underwater on loans. Additionally, paying in cash eliminates the need to rely on credit approvals and minimizes the impact of economic downturns on debt repayment. However, it doesn't eliminate all risks; unforeseen events like health emergencies or job loss can still pose challenges.

Question: There are more risks with credit ie same risks as paying cash plus more

Answer: Exactly, using credit introduces additional risks beyond those associated with cash transactions. With credit, you take on interest costs, and if the value of the purchased asset depreciates, you may end up owing more than the asset is worth. Moreover, you expose yourself to potential fluctuations in interest rates, which can impact your repayment amounts. Credit also involves the risk of accumulating debt, and if unforeseen circumstances arise, meeting payment obligations can become challenging. Choosing between cash and credit involves weighing these risks against the benefits of immediate ownership and potential investment returns.

Question: The benefits of immediate ownership and potential investment returns is not absolute, right?

Answer: Certainly, the benefits of immediate ownership and potential investment returns are not guaranteed. The value of assets can fluctuate, and there's always a level of uncertainty in predicting future returns. Additionally, the cost of credit and the risk of unforeseen circumstances can offset the advantages of immediate ownership.