Buying a house, planning a wedding, starting a business, or paying for higher studies – whatever your goal is, you need to have enough financial backing to fulfil it. And these are just planned expenses.
For financial emergencies, you need to make sure you have enough money left after covering your planned expenses. Sounds exhausting, right?
Well, you could go two ways about it – either save systematically or borrow a loan. And there’s no better solution among them. It all depends upon your financial preferences.
To help you out, here’s a comparison between the two popular means to achieve your goals.
Pros and cons of taking a loan
To start off, by taking a loan, you avoid paying a lump sum amount, thereby keeping your savings intact. These savings can be used to cover any financial emergencies that come your way.
Moreover, servicing a loan may instil a sense of financial discipline in you. Robust credit management will help you improve your credit score, which will, in turn, enhance your ability to qualify for any future loans.
Another glossed over advantage of a loan is that you also get certain tax benefits by borrowing them. That’s because the amount you shell out to pay interest gets deducted from your taxable income, which can knock you down a slab or two, reducing your tax liability.
For the tax burden, it lower, it compensates by adding the burden of EMIs. Setting aside a chunk of your income for EMIs may become stressful down the road, especially as your needs and wants upgrade.
Moreover, qualifying for loans can itself be a hassle, given the tall eligibility barriers lenders have erected today. Processing fees, prepayment penalties, and late penalties can add to the overall cost as well. Also, at the end of the day, you pay more than the actual cost of a service or product, thanks to the interest charged.
Additional Read: Understanding the Power of Systematic Investment Plan
Pro and cons of using your savings
By using your savings, you pay the entire amount in one go, essentially eliminating the whole principal-interest game. This saves you the task of servicing a loan and the burden it comes with. Plus, you don’t have to wait for a lender’s approval and can use the money as you see fit.
Moreover, the prospect of parting with your hard-earned money can be difficult, especially if you’re using it to spend on luxury. Therefore, using savings can help you avoid spending on excesses and limit your expenditure to only what you can afford, thus inculcating financial prudence.
One major downside to utilising your savings is that you may no longer have enough funds to cover a financial emergency. Using your savings also limits your affordability since you’re relying on a limited quantity to service your needs. This may lead to compromises, which aren’t healthy in the long run.
Also, savings take a lot of time to build up. And using a major chunk in one go can discourage you from saving again, as you’ll have to start from scratch.
Additional Read: SWP- Your Solution for Systematic Withdrawal
To sum up, both credit and cash have their advantages which are worth paying attention to, but also certain drawbacks which shouldn’t be ignored. Whether you’re better off paying from your savings or getting a loan entirely depends upon your financial conditions.
So, before taking a decision, conduct a careful comparison, and choose an option that has more pros than cons depending on your financial situation.