Save or borrow?
Last updated on 27 January 2016
If you want to buy something which you can’t afford from your everyday money, you will either have to save up for it or borrow. Deciding on the best option will depend on your circumstances.
Advantages of saving
Where possible, it's usually better to save than borrow. There are several reasons for this:
- The cost of borrowing. You usually have to pay interest when you borrow money, be it a loan, overdraft, hire purchase or credit card. So if you borrow £1,000 for a year and the APR interest rate is 10%, the cost of the loan is £100 (£1,000 x 10%) and you end up paying back £1,100. Exceptions to this include interest-free loans from family and friends, interest-free credit from stores (in which case check the small print to make sure it really is) or if you pay off your credit card bill in full each month within the interest-free period.
- If you save money in a savings account, it will earn interest. So if you save £1,000 you will also have interest on top of this. The amount of interest depends on the AER interest rate paid and how much you have in the account each time interest payments are calculated.
- If you save rather than borrow, you don't have to worry about how you will repay the loan.
- If you buy something with your own money rather than on credit, you will own it outright straightaway.
When to borrow
But there are times when it can make sense to borrow:
- If you cannot wait to save because you need something immediately. For example, if your boiler breaks down and you need a new one straightaway.
- If it will take a long time to save up for something you would like sooner rather than later, such as home improvements.
- The price of something is cheap now so the savings outweigh the cost of borrowing, such as goods on sale.
- You are investing in your own or someone else's future and this opportunity has to be paid for now, such as university fees.
What to consider
There are several factors to consider when deciding whether to save or borrow:
- How quickly do you need the money? If you can afford to wait and save this is likely to be the best option.
- If you decide to borrow, what's the best option? You'll need to think about what type of loans might be suitable and how much these cost.
- Will you be able to borrow? Lenders have tightened up their lending criteria, so it's not as easy to borrow as it used to be. If you want a loan you usually have to complete an application form and the lender then checks your credit rating.
- Can you afford to borrow? If you plan to make regular repayments you'll need to budget for this.
- How will you repay a loan if you are unable to work? You may want to ensure you have enough savings to help tide you over this period.