Saving for a Big Purchase Versus Taking Out a Loan

Are you considering taking out a loan versus saving for a big purchase? Before you make a decision, weigh the pros and cons of both sides to reveal the ideal option. Both have advantages and disadvantages over time, and the decision you make will have a significant impact on your long term financial situation.

Saving for a Major Purchase

A big purchase like a car or house takes careful consideration, as both may saddle you with debt for the next five or more years. However, these purchases are the two most common made by individuals or families once they begin to gain financial security.

A mortgage is usually necessary when you purchase a house. This may tie you up long-term, as it normally takes more than a decade to pay off the debt, and that time frame means you are taking a chunk of your income to pay for it.

You have an option for a fixed or variable term loan when you apply for a loan. Fixed term is ideal for prospective homeowners who plan to live in the house they buy for years. The interest rates and monthly dues remain relatively the same when you choose this option.

The variable term has a changing interest or monthly dues and is ideal for prospective buyers who are unsure of living in the area within the next few years.

Purchasing a car is not as difficult as buying a home, but it is one of the most common big purchases that people make. In most cases, you need a loan to buy a vehicle, unless you can pay with cash with your savings.

Using a majority of your savings for a big purchase is not a good idea, unless you have sources of income that enable you to recuperate the money in a short amount of time.

Taking Out a Loan

A loan requires monthly payments that carry varying interest rates, depending on what you purchase. However, loans are ideal for making big purchases such as the above-mentioned items.

You will need a steady source of income, a good credit score and a hefty savings account to get a mortgage or car loan. These show a creditor that you know how to manage your finances.

Saving for a big purchase and taking out a loan are interconnected in certain ways, especially if you plan to purchase a house or commercial property. Some big purchases like travel or buying furniture to fill your home may take a chunk of your budget if you rely on just your savings. There are other options available to you such as short-term or payday loans.

The key to making that big decision is to study your finances and determine, if you can afford to make the big purchase within your timeframe using just your savings, or if you need a loan to get it sooner.