Should you take out a loan or save? It’s a simple enough question, though the answer isn’t always as easy. When you’re considering either borrowing money or saving it, there are several factors to consider, and questions to ask yourself.
What do you need the money for?
The simplest question of them all. If you’re thinking about taking out a loan, then you should already know why you need it.
Though it’s a simple question, you should think about it in more detail. What is that you plan to do with the money, and how much will that cost? It’s important to think about this because it will immediately give you some criteria for whether you should borrow or not.
Is the thing you need essential? Do you need to have it immediately? If it isn’t essential, or if you don’t need it yet, then a loan might not be the right choice. Bear in mind that a loan will impact your credit score and that if you need a loan again in the future – for something more important – than your ability to borrow may be impacted.
When do you need the money for?
If you have some time before you need the money, then it’s probably worth saving first. Indeed, if you don’t need the money for a year – for example – then it is definitely worth saving first and then only taking the loan if you need it.
If you don’t need the money yet, then a loan might actually be counter-productive as you’ll start paying interest shortly after taking it (normally from the first month). If you could have been saving, then you’re actually spending money that you might otherwise have saved.
Of course, if you need the money straight away and don’t have the savings, a loan could be a perfect option. Balance the pros and cons of saving and borrowing, and make a decision that is going to put you in the best position.
How much can you save per month?
If you work out a budget that will see you getting the amount of money you need through saving, in the correct timeline, then it’s probably worth waiting.
Likewise, knowing how much you could save will also help you to understand how much you can afford to pay back on whatever loan you might take. If you can save £300 a month for now, then you know you can afford to pay back £150 a month once, or if, you take out a loan.
Can you afford to repay a loan plus interest?
All loans come with interest attached, and the interest terms are an important consideration. If you are planning to take a loan, then you should make sure you can pay it back. Lenders will run you through affordability checkers themselves, but these won’t be unique to your situation.
The interest you pay will depend on the borrowing you choose. For example, a loan of £9,000 could cost you a lot more if you take it out over a long period of time.
As a rule, the shorter the repayment terms, the less you will pay. If you can afford to pay back more straight away then that option will normally be best.
Whatever choice you make, it is important to budget carefully. Taking a loan can be a great option, but only if the terms work for you!