Savings Or Loans – Which Is Best For You To Take?
If you are looking to expand your home or small business, finance your college education, or simply need extra cash, you might be thinking about whether it is best to take out a loan or simply cash-in your savings. There are benefits and drawbacks to both approaches, and there is nothing that says you can’t do a little of both. But it is important to understand the dynamics of both options so that you are able to take advantage of benefits when they arise and ultimately keep your budget on a healthy footing.
Consider Interest Rates
Ultimately, the cost of any loan comes down to interest rates — and interest rates are always changing. If the economy is in a low-interest rate period, loans start to look much more attractive because you are able to ‘lock-in’ the best rates possible. For example, in the years after the ‘Great Recession,’ the Federal Reserve brought interest rates to near-zero as a means for encouraging lending and broader economic activity. This was a great time to take out a home loan or obtain auto financing because cash was cheap and businesses were trying to improve sales. In an environment like this, it would make sense to borrow more and take less from your savings, as a climate like this does not come around very often.
Never Sacrifice Your Security
Many people refuse to take out loans during any financial climate. But buying a home or automobile outright is not a luxury that many people can afford, and using all of your savings to make a large purchase can put you, your business, and your family at risk. For these reasons, it makes sense to always have a saving ‘safety net’ that you can draw from in case of an emergency. What if you lose your job? What if a family member has an accident or unexpected illness? How will the bills be covered? Conventional wisdom suggests that you should always have enough in your bank account to cover your basic expenses for six months.
Achieving the Right Balance
Of course, it is never wise to take an ‘all or nothing’ approach. So, you would never want to make a purchase entirely through loans or deplete your savings account to complete the sale. Both of these approaches will leave you vulnerable to different risks. 100% financing exposes you to the potential for excessive interest charges. 0% financing can make your savings account vulnerable if an emergency occurs. It is much better to achieve the right balance when you are trying to finance a large purchase.
If the current interest rate environment is characterized by low rates, it makes more sense to take out a higher percentage in loans. If not, the prudent move is to avoid big interest bills down the line and simply use your savings to pay off a majority of the cost. It is important to remember that the financial environment is always changing, so you will need to match your needs against the going rate to obtain a loan.
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