If we have savings tucked away and need to buy something, we can be in a quandary as to whether to use those savings to pay for it or whether we should take out a loan. There are many things that we need to consider when making this decision and it can be hard to look at it without emotion, but if we want to do the best thing financially this is what we will need to do. We will need to consider the costs, the emotional point of view, whether we need money to fall back on and whether we really need the money in the first place.
The cost is one of the most important things to consider when you are deciding whether to use your savings or to get a loan. Firstly take a look at how much money you are making form your savings. If you have an instant access savings account, then chances are that the interest rate is pretty low. However, if you have the money invested, then it could be making significantly more.
Next you will need to see how much the loan will cost. Comparing the interest rate gives you a good idea, but there are other costs that you will need to consider as well. Loans may have setup or administration fees, for example. They may also have fees for repaying them early. They will have fees if you do not make a payment in full or make it late or skip one altogether. It is worth being aware of all of these costs even if you think that you will not miss a repayment as there is always a risk, however small, that this could happen.
Obviously it is wise to compare different loans as their costs will vary. You will probably want to compare the cheapest loan option with the return you are getting on your savings so that you can calculate which will be the best option.
It will be likely that you have used a lot of effort in order to save up the money that you have. This means that parting with it can be really difficult. We can often feel attached to it because we worked so hard to get it and feel like we want to keep it because it was so hard to get. This feeling can be even stronger when the money is being saved up for a specific purpose perhaps to pay for a holiday, new car or something like that. However, we need to try not to let emotion get in the way. If we take a loan we will have to make regular repayments to repay it and pay out interest as well. If we use our savings we will avoid that extra cost and we can spend what we would have used for repayments to put money back into the savings account and might even end up with more in there than we had to start with.
Money to fall back on
Many people do get concerned if they use up all of their savings that they will not have anything to fall back on. However, using a loan is an expensive way to keep that back up money. If you have an overdraft or credit card, then you do have funds that you can fall back on and so if there is an emergency you will still have some money there if you need it. If you do not have these then there are still ways that you can get money, perhaps by applying for them or by getting an additional loan. However, it is worth being positive and thinking that there may be no need to want money to fall back on. If you are careful with your spending while you are replenishing your savings account, then you should not need extra money. If you only buy basics then it should not take long to build up a pot of money again.
Do I need the loan?
It is worth asking yourself whether you really need to buy the item that you are pondering how to finance. It might be that you can wait a while before you buy it and save up for it. This would mean that you would no longer have this dilemma as you would not need to borrow money or use your savings. It can be worth deciding whether you can wait for the item and calculating how long it might take you to save up for it if you are really careful. You could even consider ways that you might be able to make some extra money so that you can buy it more quickly. You might find that it will not take that long and you will not have to worry about the stress of a loan or spending your precious savings.