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Save or Borrow?

If you need to make a purchase that you do not currently have the funds available for, you will have two options available to you – either to save or to borrow. These are obviously very different approaches, opposite in fact, so which should you opt for, and what do they offer to you?

The first and most important difference is the timescale, getting a loan will be a far quicker way of getting the money than saving will be. If you are in a hurry for the money, or if you need it sooner than you would be able to save up the required amount then a loan is the only option.

In terms of making the most of your money, saving up to be able to afford whatever it is you wish to buy is the best option. For example, if you need a thousand pounds and you take out a personal loan at a rate of 17.9% APR, you would end up paying £92 in interest. Conversely, if you were able to wait for the money you could save up for the amount by putting aside the monthly amount equivalent to what you would be repaying on such a loan in a year.

By taking the saving approach, you would not only save yourself the £92 on interest payments, but you would actually earn interest on the money you are saving, and so the saving could be around twenty to thirty pounds more. While the savings may be small, they should not be discounted and show that if you can wait and raise the money yourself you will be better off than you would by turning to a lender.

For most people, when they are considering applying for a loan they are doing so because they want or need the money relatively soon, and as such saving is generally not a realistic option. Having a savings account is a good idea, and financial experts recommend that you have the equivalent of two or three month’s salary put away.

Surprisingly, a number of people who do have savings available to them opt to leave that money untouched and still take out a loan – this simply does not make economical sense. A typical personal loan can range from 6.5 – 17.5%, whereas instant-access savings accounts pay around the 4 – 4.75% range. It’s clear to see that loosing out on say 4.75% interest is better than paying 17.5% - 12.75% better, in fact.

If you do have the money available to you then use it, even if you do not have the full amount that you need you should use what you do have to offset the amount you borrow as this will effectively save you the difference in the interest.

A loan can provide you with the money that you need when you need it, whilst planning for expenses and saving accordingly will mean that you make the most of your money.