Is it Better to Save up or get a Loan?

There are advantages and disadvantages of getting a loan compared to saving up to buy something. It is worth thinking hard about them before you do borrow money. There are many reasons why one may be better than the other for you personally and it is worth thinking through the possibilities and consequences before making your decision.

The first thing to consider is the cost. Borrowing money will cost you money whereas saving money could earn you some money. With exception of rare interest free loans, all loans will cost you money. You will have to pay interest on that loan as well as possibly having to pay fees as well to set it up. You may also have to pay charges if you miss repayments or cannot make a full repayment for some reason. This cost can be quite high and it is worth calculating or estimating what it might be so that you can see how much more you will pay for the item if you borrow money to pay for it. Imagine that the item was that price when it was for sale, would you still have considered buying it? If you save up for the item and put the money into a savings account as you save, you will get some interest paid to you. It may not be a great deal of money but it will be something.

It is also worth thinking about repaying the loan. You will normally have to repay a set amount each month for a certain term. This will mean that you will have to find that money each month to pay out. Think about whether you think that you will be able to afford it. Make sure that you look at how much you pay out now and how much money you have coming in and see whether there is enough left over to make the necessary repayments. If there is not then you will need to think about how you will adjust so that you can afford it.

An alternative to borrowing the money is to save up for the item instead. This will mean that you will need to put some money aside each month and then once you have enough you can buy it. This can be very similar to loan repayments in that you will be committing a certain amount each month. However, it will not cost you any money and if you are short of money one month, you could just save less and save more in a month when you have more money, so it is much more flexible.

As well as costs there are other consequences of borrowing money. Some people will start to borrow more and more money and that will mean that they could get into serious debt problems. This may not happen to everyone of course, but it is a risk that some people will not be willing to take. There is also the stress of being in debt. Some people do not like owing money and find it very stressful when they do owe it to anyone. That stress may make them regret getting the loan. If you have never borrowed money then try to imagine whether you might feel like this, if you have borrowed before then you should be able to think about how you felt about borrowing in the past.

You need to think about whether you need the item immediately or whether you are prepared to wait for it. This can be quite a difficult decision to make. You need to think about how much the item is worth to you and whether you think that you would rather get it quickly and pay extra for it as a result or whether you would rather wait and save up for it. You may worry that it will sell out if you do not get it straight away or that you will no longer need it or want it. It may be something that you need for an emergency. On the other hand it could be something which is in good supply and that you can wait for. This is a very personal decision, you will need to think about the cost of the item and whether you think it is worth paying extra to get hold of it straight away or whether you would rather wait and save up and spend less on it.

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