Purchasing assets with cash is always the best option if one has the surplus to do so. James Thomas explains why.

"I have always wondered what is the best thing to do in terms of payment when it comes to purchasing a car, a home or even home appliances. How much equity should I look at putting as a down payment? Some of my friends have advised me to make these purchases with debt rather than putting my own money. What's the best thing to do when I have enough cash at hand to pay at least 50 per cent down payment? Should I still go for debt, or use my own cash instead?"

Very simply, if you can afford to buy with cash, then that is the best and most straightforward option for any purchase. In an ideal world, it avoids any delay in the purchase of the item and you can buy it when you want and at a price that you are happy to pay. It also avoids any costs related to arranging the debt and then the servicing of the debt. And, if you ever wish to sell, you can do so very easily without any complications.

However, very few of us have access to unlimited reserves of capital to fund whatever we wish to purchase. This is where debt can come in and provide a shortcut to allow us to buy the things we want now. But there is no such thing as a free lunch. Debt very rarely comes for free, and this is where problems can arise.

If you are buying a property, I always recommend putting down the largest deposit that you can afford. Most people will find that this amount will be dictated by their lender, as they will stipulate how much deposit you have to put down. But if you do have excess funds at hand, then it is worthwhile putting down more. If you have 50 per cent available as a deposit, then this will give you a lot more options with regard to who you can borrow from and will enable you to obtain a more competitive rate of borrowing.

Debt can be classed as good debt and bad debt. Good debt is usually long-term debt that is used to purchase very large items such as properties. These are purchases that most people would struggle to buy without the help of debt, often referred to as mortgages. This debt is usually offered at a low rate of interest but over a long period of time. Therefore, this makes it affordable to the borrower, while the lender makes their profit over the long term of the contract. Such terms are normally offered, as property is traditionally seen as financially secure over the long term, and there is a physical asset that the lender will take effective ownership of until the debt is repaid.

What I would categorise as bad debt is debt that is used for smaller purchases that you may not really need, or that you use to fund a certain lifestyle that you cannot afford on your salary alone. This type of debt would normally consist of personal loans and credit cards. This debt is generally designed to be of a much shorter term and so normally has a much higher interest rate attached to it.

By way of comparison, I looked through the MONEYworks best buy tables, and the best mortgage rates are currently around eight per cent per annum, while credit card interest rates are around two to three per cent per month, which equates to over 40 per cent per annum.

Having said everything above, as always, it is not necessarily cut and dry as to whether debt is good or bad and what fits into each category. A mortgage can prove to be a terrible burden if you overstretch yourself, and as we are seeing at the moment, the issue of negative equity appears. For the past 10 years or so, property had only gone one way, and it had largely been forgotten that property generally behaves like any other asset and can fall as well as rise. Following a huge rise, then followed the almost inevitable fall, and a lot of property owners are now in the position that they owe more than the property is actually worth.

The flip side is also true in that managed in the right way, credit cards can actually be an asset. Credit cards allow the purchase of goods without having to carry around large amounts of cash, and some offer attractive points/reward schemes. But the key point is to make sure you repay the entire amount every month. That way you will not have to pay any interest at all.