It is not easy to manage your finances in times of crisis. This requires hard work, discipline and patience. You will need funds to handle any situation, whether looking to purchase a home or renovate an existing one. Although some expenses can be managed, others are unpredictable and may arise at any moment.
However, those with sufficient savings can use them to help meet financial challenges. Not everyone is that prepared. Exercising your savings is a bad idea. It leaves you with little or no money for future monetary problems. You will also lose potential returns if you take your savings out of fixed deposits or mutual funds before the time is up.
There are many options for paying for an emergency or large purchase. Do you prefer cash or a loan? Should you save or borrow? Many people believe it is better to save money and buy to avoid future debt. An expert’s view contradicts, as they believe that in reality, there is a balanced answer to the saving-versus-personal loan question.
PROS & CONS OF USING SAVINGS
Many people believe that borrowing a loan is better than spending their savings. You don’t have to pay monthly EMIs, and you won’t be burdened with the loan payments. These are the pros and cons of using your savings.
PROS:
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- Interest-Free Purchase – Let’s say you want to purchase an iPhone or other expensive gadget, and you apply for a personal mortgage. To pay that personal loan interest, you will need to pay the Amount X + the interest. You don’t have to pay interest if you choose to buy the product from your savings.
- Stress – Although spending from your savings may seem burdensome at first, it will help you to ease the stress of repaying the loan. You can also draw a spending limit for yourself to determine how much money you have available.
- Higher Financial Wisdom It’s easy for people to fall into debt when they know that the loan you are using to finance the purchase is a loan you will have to repay later. If you aren’t good at financial discipline, this could lead to reckless spending and other bad habits. Savings can help you be financially disciplined. You should limit what you can afford to save money and go over your budget.
CONS:
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- Savings Limit Your Affordability. One of the greatest cons of saving is that you cannot afford to spend the money you have saved. It is a good idea to keep an extra stash of savings. This limits your ability to afford your needs and wants, which may not always be possible.
- Savings are not easy Many people don’t want to put their savings in bank accounts. Instead, they prefer to invest them in shares, mutual funds and gold. These savings can take time to convert into cash, making it difficult for people who need immediate funds.
- Blocks Future Plans If you have been saving for a car, home renovations, or an expensive gadget/appliance, it can be a bit daunting to give up that savings to help another cause. This can also hinder your plans, as you will have to start all over again to save money for the same cause. A loan is the best option in such cases.
PROS & CONS OF AVAILING OF A PERSONAL LOAN
Loans can be a great way to leverage substantial gains, breaking the myth that debt is a burden. These are the pros and cons of getting a loan.
PROS:
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- A personal loan or a home loan can help reduce your tax burden. Professionals with high taxable income should consider a home loan or personal loan instead of saving.
- Develop Financial Discipline The decision to take out a loan requires financial discipline. This will make it easier for the borrower to understand and appreciate the costs of each dollar spent until the loan is paid off. You can look at the bright side of borrowing a loan as a way to be financially responsible.
- No Limit on End-Use – A personal loan does not restrict how the loan amount can be used. The loan amount can be used in any way you like, which allows for greater flexibility in spending.
CONS:
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- EMI Charge – Loans imply paying EMIs over a loan repayment term ranging from a few months up to many years. The financial impact of one large purchase can be felt for months or until the loan is fully paid off. It may seem overwhelming to pay EMIs with a large portion of your income. It is easier to pay the EMIs over time than lose all your savings.
- High Credit Score Most lenders prefer applicants with a high credit score of over 725 to be eligible for personal loans. This may be a barrier to getting instant funds for those with low credit scores. Although it does not mean you won’t be approved for a loan, a low credit score will result in higher personal loan interest rates than others. You can also see the positive side of having a high credit score to be approved for personal loans.
- Additional costs – Some banks or NBFCs may levy personal loan costs such as prepayment fees, loan processing fees and late penalties. These costs add up to higher loan costs for borrowers. You can avoid the late payment penalty if your loan EMI payments are on time.
THE FINAL REPORT
Both savings and loans both have their advantages and disadvantages. Your financial situation will play a major role in weighing these options. Spending all of your savings and borrowing a loan are not wise decisions.
