Category: Borrowing

Should you use Savings rather than Borrow Money?

There are some people that borrow money despite having savings. There are different reasons for this, perhaps they are saving up for something or they like to have some money to fall back on. However, some people will spend the money that they have rather than borrowing money. Which is the best thing to do?

If you look only at cost, then using savings is the best option. You may receive some interest on your savings but you will find that this will not be very much compared to the cost of a loan. It is easy to compare the two simply by comparing the interest rates. You will then be able to clearly see how much more expensive it will be to borrow money compared with saving it. So therefore, those that are concerned about the cost of a loan will use their savings first so that they can save money.

The reasons for keeping savings and borrowing can vary a lot. Some people feel that they should have some money to fall back on, so that if they need more during the course of a loan they will not need to borrow more. However, if they spend the savings there is a chance that they will not need to borrow anything at all and they will save so much money. If they do need to borrow, they may not need to borrow so much or for so long and it could still work out a lot cheaper. It is always worth doing the maths and working out how much more it will cost you if you keep your savings rather than using them. The peace of mind that comes from having savings is worth something and you will need to weigh that up. However, as soon as you have bought the item you want, you can start building up you savings again. It may take a little while, but if you are careful with your spending and make sure that you allocate some money to your savings account each month, you should be able to soon replace them and you will not have to pay for the costs of a loan.

Some people might be saving up for something specific and so not be prepared to use those savings that they worked so hard to build up. They may feel that it will be a failure of that hard work if they spend that money. However, it is worth considering the cost of doing this, if you calculate the cost of the loan and how much you would save if you used the savings instead then this may help you to change your mind. You will be able to save more money in the long term if you do not have repayments on a loan to make. It is also worth noting that it will be very hard to add to those savings once you are having to make repayments on a loan. However, with no loan you will be able to use the money that you would have spent on repayments , on building your savings back up again.

The reason that you are saving could make a difference to whether you are prepared to spend the money even if you realise that it makes financial sense not to do this. There could be many reasons for this, perhaps if you are saving for someone else or to purchase something for someone else. As long as you are aware of the cost of doing this and you make an informed decision then this would be fine. However, if you are not aware of the costs and do not really have a reason that has been well considered, then you could be making a big mistake and end up losing a lot of money without even realising it.

So if you have savings then it is better to use these to pay for things rather than using a loan. Loans are expensive and you will be able to avoid this cost if you use your savings instead. You will also have the advantage of not having a loan hanging over you and therefore avoid the stress associated with owing money and making sure that you can afford the repayments each month.