Should You Buy a Big-Ticket Item in a Recession?

If you need a new car, a big new appliance or are considering a major home renovation, you may be wondering whether you should forge ahead with the purchase now or shelve any plans to lay out a significant bundle of cash during these uncertain economic times. There are a variety of reasons why you might want to defer your plans or not.

Greater risks

Warranties are worthless after bankruptcy. If you're on the fence about a purchase, don't let something like an extended warranty be the deal-clincher. Many retailers, including carmakers, are forced to sweeten the pot to lure buyers in the door; sometimes, the very best deals are offered by companies in the worst financial shape. If the retailer goes bankrupt, your warranty is worthless.

Bigger bargains

Recessions can have a silver lining. The upside of this recession is that the cost of many things has fallen. Retailers of all stripes, including car dealers, are seriously hurting from slumping sales, so there are some great "deals" out there, including 0% financing, little money down and deferral of payments for one year or more. Carmaker Hyundai is even offering to take back your new car if you lose your job or declare bankruptcy within one year of purchase.

If you have very good credit and you must, to qualify for such favorable terms, you'll enjoy the full attention of salespeople who will bend over backwards to clinch the sale.

If you're contemplating a new home purchase, some of the better-known national builders are offering unheard-of discounts and perks, such as offers to pay your mortgage for the first year, or throwing in a new car to park in your new driveway. Because home sales have dwindled, you may have more power to dictate the terms of your purchase than you would have had a few years ago. Of course, the millions of foreclosed homes present deeply discounted buying opportunities for buyers, too.

Furniture and appliance stores, particularly those that have gone bankrupt, like Circuit City, are having fire sales, advertising 0% interest and deferred payments. Be sure to read the terms and conditions; you could be incurring interest during the entire time your payments are deferred. By paying in cash, you can avoid such traps.

It's cheaper to borrow money. While lenders have tightened lending standards considerably, borrowers with excellent credit will enjoy unprecedented low interest rates - not just for homes, but for cars or other items that require financing

When deciding whether or not to move forward with a significant purchase, be brutally honest in assessing "need" versus "want." If you were planning on buying a new car this year, make sure your decision is based on real need, not just "want." Of course, this is practical advice for any time, but even more important during a recession. If, for example, your continued employment is in jeopardy, now is not the time to incur new debt or even pay cash (if you can afford to do so), because you may need that money to cover essential living expenses should you lose your job.

Is your car search simply a case of wanting to upgrade from a forgettable but reliable shoebox to a luxury vehicle with all the bells and whistles? Or did you just blow the transmission or incur another pricey car repair in your 10-year-old clunker? If it's the latter, there may be no way around purchasing a new or used vehicle.

In the same way, it's one thing to move forward with a new bedroom addition when you're really squeezed for space and Grandma, or Junior, is coming soon, but committing to a master bedroom suite with California closets may be a questionable discretionary expense, given today's economic realities.

Only you can decide whether a given purchase is wise and doable. This is true at any time, but an economic recession means that the risks of shorting yourself of much-needed emergency cash or damaging your credit if you overextend yourself just before you get a pink slip are greater than during times of relative economic prosperity.

Cautionary tips

If you do decide to move forward with a big-ticket purchase or a major home renovation, here are a couple things to keep in mind.

* Hold onto your HELOC. If you're fortunate enough to still have an open home equity line of credit (HELOC), you can still use it to fund your home improvement, but even if you decide not to proceed with your project, keep the HELOC open as a source of emergency funds should you need them. But don't, says Consumer Reports, use your HELOC to maintain or enhance your lifestyle, for example, by using it to purchase a plasma TV or embark on a cruise.
* Watch the add-ons. If your big-ticket item comes with possible add-ons, be very cautious about buying anything more than what you need. It's easy, in the face of what you're already spending to buy a new car, to justify numerous extras without realizing how much more they will cost you.

Irresponsibility caused the recent financial crisis. Use good judgment and be flexible about the timing of your purchase, and you just may land a bargain when buying your big-ticket item.

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