There are some situations, rare as they may be, where you have the opportunity to pay off a big purchase in cash. Even if you can pay an item off in cash, though, it may be a better idea to take out a loan.
The structure of debt
A credit score is based on a wide variety of factors, but one major factor is the availability and utilization of debt. The way that debt is structured has an effect on the way your credit score is measured. A large loan, mortgage, or other high limit debt counts as “credit utilized” in the measurement. Utilizing your credit counts as a positive mark on your credit report. Having debt that is very close to your available credit is a negative mark; having very little available credit is also a negative mark.
Counting debt as an asset
The debt of a mortgage or loan also provides something that is very difficult to build otherwise; a history of payments on a debt. Payments on debt is measured differently than payments on an revolving account. When you have a history of payments on that installment account, banks and credit unions are more willing to lend you money, because you have a history of payments. If you want to borrow against your house in a home equity loan or line of credit, then a history of payments on your home can also help the bank feel more comfortable taking that risk.
[Personal Loans can count as payments, depending on the loan.]
Choosing debt to have
If you have planned or come into enough money to be able to pay off a very large purchase, but want to structure it as debt, then choose carefully. Choose a loan that is for a relatively short time period; five to ten years for a mortgage, or one to three years for a personal loan. Look specifically for a loan that has no penalty for early payments or overpayments, and buy down points on the interest rate. Make larger payments on the minimum, but be sure to stretch your payments out to at least half of the amount of time the loan was originally issued for.
What to do with your money
So, if you have taken out a loan and do have the cash to pay it off, then what should you do with the money? Your best bet is to put the money in a high-yield savings account or interest-bearing savings account. You will not make as much money on the interest as you pay in interest on the loan, but by making some income from interest, you will be coming out ahead. If you have a bit more of an appetite for risk, ask an investment advisor about an investment account that will be easy to withdraw out of on a regular basis. You should also pay down any high-interest debt that you are carrying other than your target loan.