How to pay for a major purchase

From time to time, you’ll make a large purchase that may require more cash than you have on hand. Maybe the money is for a wedding, a new home or home remodel, or a luxury purchase like a new car or boat.

Why planning for a large purchase matters

When thinking about how to pay for a major purchase, there are a few key factors to consider. Asking yourself the following questions—and understanding the available funding or financing options—may help you select the one that best fits with your financial plan:

• How much will it cost? Be sure to include actual upfront cost and any ongoing maintenance, storage, repair or other expenses. For example, a home improvement project may go over budget, and a boat will have to be docked and maintained over time.
• What is your timeline? Do you need the money quickly or is this an expense that you have more time to plan and budget for?
• How will it affect your financial plan? How will this purchase factor into and/or align with your broader financial priorities?
• What is the “time value” of the money? If, for example, you’re thinking of withdrawing money from an investment account, how much would that money have earned in compound interest and growth over the next 10 to 15 years? Is it worth losing that sum in exchange for paying cash for a new boat, business or second home?

These are important considerations before making a major purchase, especially if your decision would affect your retirement savings or impact other financial goals.

Comparing your options for financing a major purchase

There are several ways of paying for or financing a major purchase, including cash (from checking or savings), credit cards, personal loans and lines of credit, and even investment accounts. Each comes with its own set of caveats.

Here’s a breakdown of the pros and cons for common financing options to pay for major purchases.

Cash

Paying with cash allows you to own your purchase outright immediately, avoiding monthly payments and interest charges.

Pros:

• Eliminates interest costs entirely.
• Provides immediate ownership and peace of mind.
• Keeps your monthly cash flow free for other goals.

Cons:

• Reduces your liquid savings, potentially impacting your emergency fund.
• There may be an “opportunity cost” in that your cash could be earning a return elsewhere.
• May require a long period of saving which could delay your purchase.

Credit cards

Credit cards offer convenience and the potential for rewards, but they can be costly if managed incorrectly.

Pros:

• Convenient and immediate purchasing power.
• Potential to earn points, miles, or cash back on significant spend.
• Some cards offer purchase protection or extended warranties.

Cons:

• High interest rates can quickly negate any rewards earned if the balance isn't paid in full within the billing period.
• High usage can temporarily lower your credit score.
• Late fees and penalty APRs can add up significantly.

Personal loans

Personal loans can provide a lump sum at a fixed interest rate, often lower than credit cards, making them useful for debt consolidation or funding specific projects.

Pros:

• Fixed monthly payments make budgeting predictable.
• Interest rates are typically lower than credit cards.
• Unsecured options mean you don't need to put up collateral.

Cons:

• Origination fees can increase the overall cost of borrowing.
• Interest rates are often higher than secured loans (like HELOCs).
• Taking on new debt increases your debt-to-income ratio.

Home equity line of credit (HELOC)

A HELOC allows you to borrow against the equity in your home. It acts as a revolving line of credit, like a credit card, but usually with lower rates.

Pros:

• Interest rates are generally lower than unsecured loans.
• Interest may be tax-deductible if the funds are used for home improvements.
• Flexibility to borrow only what you need, when you need it.

Cons:

• Your home serves as collateral, so failure to repay the HELOC puts it at risk.
• Variable interest rates can rise, increasing your payments.
• Closing costs and annual fees may apply.

Securities-based line of credit

Also known as liquid asset secured financing, this option lets you borrow against your non-retirement investment portfolio without selling your securities.

Pros:

• Keeps your investment strategy intact, avoiding potential capital gains taxes from selling.
• Typically offers lower interest rates than personal loans.
• Fast access to liquidity without a lengthy application process.

Cons:

• Market volatility can lead to a "maintenance call," requiring you to deposit more cash or sell securities.
• Interest rates are often variable and can increase.
• If you cannot meet a call, the lender may sell your securities to cover the loan.

Investment accounts

You can liquidate assets from a brokerage account to fund a purchase. This provides quick access to cash but requires careful consideration of tax consequences.

Pros:

• Immediate access to funds without taking on debt.
• No interest payments or monthly bills.
• You maintain full control over which assets to sell.

Cons:

• Withdrawing earnings on investments may trigger capital gains taxes.
• Reduces the compounding power of your portfolio, potentially impacting your long-term goals.
• Timing the market is risky; selling during a downturn may lock in losses.

Note: IRA or 401(k) withdrawals often carries penalties and taxes and generally should be a last resort.

Align major purchases with your long-term financial goals

As with all good financial decisions, the best way to pay for a large purchase is to complement your overall financial plan. For example, if you’ve allocated most of your cash to improving your current home, then you may not be able to make a strong offer on a new property or take advantage of a good investment property buying opportunity.

Also consider your timeline, both in terms of the immediate major purchase and your mid- and long-term financial goals. Consider consulting with your financial professional to understand how a major purchase fits into your broader financial plan.

Learn more about your options for funding major purchases and life events.