Saving vs Borrowing for a Major Purchase

saving vs borrowingNeither a borrower nor a lender be goes the ancient proverb. In an ideal world most of us probably would rather not borrow, but the reality is that some purchases just seem to require it, particularly the larger ones.

If you were brought up on such ideas as ‘you shouldn't buy what you can't afford,' then you may never ever make any major purchases. Indeed without borrowing most of us would struggle to purchase things like vehicles to get to work, and as for a house, there aren't many of us in a position to save for such a huge purchase and pay it outright. So let's consider some pros and cons for borrowing versus saving for a purchase   .

Interest on loans

One obvious disadvantage to borrowing is that, in most cases, you will have to pay interest whether it is a mortgage, car loan, overdraft or your credit card. There are, of course, interest free credit cards offering over a year interest free on purchases and transfers and cash back on purchases which means you effectively get paid to spend.  However, when it comes to major purchases you're going to pay interest in the long run so you'll need to calculate what the monthly repayments will be and be honest with yourself as to whether you can afford them.

To Save or Not To Save for a Major Purchase

When it comes to saving for a purchase, an obvious advantage is that it takes the headache out of worrying how you will pay it back. And, of course, paying for something outright means you own it outright. This is all very well and good if you're in a position to save some cash to make your purchase but that's not always in the cards.

Suppose there is a sale on and an item is being sold at a massively reduced price and the sale will end tomorrow. You don't have the cash. If it's something you really need and were going to buy anyway, then buying on credit makes sense in the long run provided  you pay off the debt in a timely manner. The same applies to larger purchases too. If the price of property is only going to go up, then borrowing while the price is low is not a bad idea.

Long Term Investments

When it comes to future employment and career prospects, then borrowing for higher or further education can make sense, particularly when you consider that in the case of student loans they will only need to be paid back when you've graduated and are earning enough to easily afford repayments. If it's the difference between saving for many many years, possibly working at something you really don't enjoy and wasting valuable years in the process, then student loans are the preferable option for many people.

Can You Wait?
There are some things to consider when it comes to borrowing such as: How soon do I really need the money? If it is not an emergency (broken vehicle for example) and you can afford to wait, often saving is the best choice.

If the time it will take to save up for something is extremely long, then it may be a good idea to borrow, particularly if it's for something that may be considered an investment, such as improvements to the home.

Questions To Consider

It is sensible to consider all your options before taking on any type of debt.  For example, what type of loan will you take out? A student loan for university education is entirely a different matter to taking out a loan against a car in terms of the demands for repayment.

Bear in mind too that reputable lenders aren't so quick to lend as they once were and the criteria is somewhat stricter these days. You'll need to consider as well what may happen if you are unable to repay your loan through illness or a job loss. Having some savings set aside for such emergencies makes sense.

So, what is best? To save or borrow? There really is no simple answer. It depends on the circumstances. But by keeping these points in mind, you might just make the best decision for you when it comes to saving or borrowing for life's major purchases.

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4 Responses to Saving vs Borrowing for a Major Purchase

  1. Dan from MakingtheJourneytoWealth 01/19/2017 at 10:19 pm #

    Very thought provoking. It really does depend on the circumstances I suppose. There was a time I took out a small loan from my credit union to pay off a credit card balance that was relatively small. I did this because the loan interest rate was lower than the credit card interest rate. Also, because I used my credit union, they could directly deduct an amount of my choosing from my paycheck every week. I paid the loan off very fast, saw a good credit score boost, and also took care of a small credit card debt.

  2. Matthew 01/20/2016 at 8:46 pm #

    If you can easily take the money out of an ATM for it, then you should pay cash. If it is a great investment, and it costs so much that it would leave a gaping hole in your bank account, or eclipse it altogether, then borrowing is better.

  3. Jayson @ Monster Piggy Bank 01/19/2016 at 5:27 pm #

    When I was in college, I made one of the biggest decisions I ever made to borrow or to have a student loan. And I considered all those consequences of my decision, but I thought it was worth it because I was able to finish college at my own university and degree. I think saving versus borrowing is mostly dependent on circumstances.

  4. Jayson @ Monster Piggy Bank 01/17/2016 at 1:11 am #

    To save or to borrow? Yea, I agree with you that it really depends on the situation and needs. But, I somehow in favor of saving because it has a positive connotation and doesn’t result in loss of money.

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