When to Save vs When to Borrow

When it comes to making a large purchase, some of us may find ourselves in the same dilemma: to pay cash or to take out a loan. While paying in full upfront is an ideal situation, that’s not a reality for most of us, especially in situations where our purchase is urgent. Whether it’s a new laptop, appliance or even a car, the choice between saving and borrowing depends on many factors that are unique to your situation. Consider the benefits of each option to find the solution that’s right for you.

Saving for a Purchase
Sometimes financial constraints force us to delay purchases until we can pay in full. However, even if you have the option to finance a significant expense, here are a few reasons to consider waiting until you’ve saved up:

• Determine savings goal: Use a spending plan to organize your finances and calculate the time needed to reach your savings goal.
• Negotiating power: Paying cash upfront gives you leverage to negotiate better prices for non-emergency items.
• Interest considerations: Any interest earned is preferable to paying interest on a loan.
• Down payments: When buying a large item that allows for a down payment, saving up allows you to secure a smaller loan and reduce your borrowing costs.

Borrowing to Make Payments
Debt is commonly seen as a detriment to our finances, but there are some situations when taking on debt is a sensible choice:

• Urgency: When an essential appliance or car breaks down, waiting isn’t an option.
• Price increase or sales: Sometimes special sales or impending price hikes can make financing a purchase save you more.
• Appreciating assets: Strategic investment purchases like an education or a home will typically increase in value to eventually earn you more.
• Low interest rates: During periods of exceptionally low interest rates, financing a purchase might be an attractive choice versus tapping into savings or waiting until you can pay cash.

Borrowing to Pay in Full
Making a purchase with a credit card is another alternative that gives you a mix of paying in full and borrowing. While this can be an excellent option, it’s important to keep in mind the risks that come with credit cards. Consider these benefits of using a credit card for large purchases:

• Extended warranties and purchase protections: Many credit cards provide extended warranties and purchase protections that can help safeguard your investment.
• Flexible payment options: You can pay off your purchase over time, especially if your card offers a promotional interest rate.
• Rewards: Some cards offer rewards like cash back, miles or points.

Whether you decide to save up, take out a loan or use a credit card, thoughtful planning is key to living the life you want while continuing to build slack and reduce financial stress. For personalized financial guidance, visit your nearest Financial Health Center.