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I live in France where credit cards are less widespread than in the U.S. The default account for us is a checking account. Often you can't spend more than what is in your account; otherwise you have to pay the money back with a huge interest (16% or so).

I never took a loan or used a credit card, and I always pay cash at once for everything I buy. If I want something expensive, I save monthly until I can afford it.

I know I will probably need to do a loan to buy a house one day, but I am saving so that I will be able to provide a substantial amount first. I am considering buying a car and I will probably take a cheap one in order to pay for it completely.

I wonder if this is a good practice. Am I missing good opportunities by not using the credit system?

In which situations is it better to consider a loan instead of paying cash?

  • "Pay back with a huge interest" has two possible meanings. Do you mean "16% APR or so"? (For example, if you wait 3 months to pay it off, you will owe 4% in interest.) Or do you mean that there is a large fee for borrowing this way? (For example, if you wait 3 months to pay it off, you will owe 16% in interest and/or fees.) Some American lenders (such as "pay day" lenders) have both large up-front fees and high ongoing interest rates. – Jasper Dec 29 '15 at 1:45
  • "I never took a loan". I edited the post – Octoplus Dec 29 '15 at 10:17
  • @Jasper I meant that you will have to pay a 16% (yearly) interest on the money you borrowed that way. You will often have to pay an up-front fee because you were not allowed to do it first. – Octoplus Dec 29 '15 at 10:19
  • It's a kind of amusing to see that concepts such as using credit cards and credit history are not prevalent (or non-existent) in France, while in China they're already basically common sense knowledge to everybody. China is really becoming like the US in a lot of ways, which doesn't seem very promising to be honest. – xji Jan 4 '16 at 7:52
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Your practice of waiting until you can pay cash is a good one. It will certainly prevent you from getting into debt!

Now, to be clear, your question puts a credit card in the same category as a loan, but it doesn't have to be. You could use a credit card almost like cash, if you are careful.

I'm not familiar with the system in France, but in the US, even if you are paying cash all the time, there are some benefits to getting a credit card and paying it off in full every month, instead of simply paying with cash. Some of those benefits are:

  • You get to wait 20-30 days before paying for the items.
  • You will start to build a credit history, which in the US is helpful when you want to borrow money in the future. [Note: The concept of credit building currently doesn't exist in France. Thank you @Relaxed for mentioning it.]
  • You don't have to carry as much cash around with you. If you lose your wallet you can cancel your credit card and get a new number.
  • Some credit cards allow you to earn "points", "airline miles", or even cash back on every purchase. Typically the value of these incentives ranges from 1-2% of the purchase price and it is basically free money (when compared to paying cash). [Thank you @apsillers for reminding me of this.]

One pretty big downside of having a credit card depends on your personality. Some people, once they have credit, end up spending beyond their means, and end up getting into debt.

Please look into whether credit cards work the same way in France before considering the above advice.

As for your question regarding getting a loan vs paying cash, that will usually be personal preference, since with a loan you can buy expensive items (such as a house or car) much sooner than you otherwise could if you waited until you saved the money. For example, it might take 10 years or more to build up enough money to purchase a house with cash, so if you don't want to wait that long, you'll need to finance it.

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    I might also add "cashback rewards" to an advantage to fully paid-off credit cards. Of course, you must be careful that appeal of getting cash back does not change your spending patterns in a way that would jeopardize your ability to pay off your bill each month! – apsillers Dec 28 '15 at 22:56
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    (+1) Credit history isn't relevant in France. – Relaxed Dec 29 '15 at 9:52
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    @TTT Why is waiting 20-30 days before paying for items a good thing? I can have this option on my debit-card, it is called "delayed payment" but I don't see the point. – Octoplus Dec 29 '15 at 10:37
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    @Relaxed - thanks for pointing that out. I'm curious, does France not have the concept of a credit score? Do you know how they make credit determinations? – TTT Dec 29 '15 at 15:05
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    @TTT There is a sort of blacklist (managed by the central bank) if you repeatedly failed to pay your debts but that's relatively rare and that's not a score. I don't know much more than that beyond the fact that the concept of a credit score is indeed unknown in France. – Relaxed Dec 29 '15 at 15:19
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A loan with modest interest is better than paying by cash if there are better alternatives for investment. For example, suppose you are buying a house. Consider two extremes: a) you pay the house entirely by cash, b) the entire buy is financed by the bank.

Historically, real (subtracting inflation) house prices (at least in the U.S.) have not risen at all in the long run, and investing all of your own capital in this way may not be optimal.

Notice that we are looking at a situation where one is buying a house and living in it in any case. Rent savings are equal in cases a) and b). If instead you were buying a house not for yourself, but as a separate investment for renting out, then you would receive rent.

In the case a), the real return on your capital will be zero, whereas in case b), you can invest the cash in e.g. the stock market and get, on average, 7% (the stock market has yielded a 7% real return annually including dividends) annually minus the bank's interest rate. If the interest is lower than 7%, it may be profitable to take the loan. Of course, the final decision depends on your risk preferences.

  • Comments are not for extended discussion - some of this conversation has been moved to chat and the rest deleted. – Ganesh Sittampalam Dec 29 '15 at 10:22
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    The OP makes it pretty clear he isn't talking about house-buying in this question. – DJClayworth Dec 29 '15 at 17:01

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