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Is it Better to Take a Loan or Use Your Savings?

August 23, 2023 • 1043 views

Taking a loan vs. using savings is a never-ending debate for individuals. There is no perfect choice between taking a loan vs. using savings. Both these options are viable as per personal choices and financial requirements. While taking a loan can be beneficial if you require more than what you have in your savings. On the other hand, using savings can be a great way to make purchases without worrying about interest rates. The downside of taking a loan is that you will have to pay interest. To help you narrow your choices, read this blog to gauge whether it is better to take a loan or use your savings.

Pros of Taking a Personal Loan

Can Make You Disciplined Financially

Taking on debt can make you financially responsible and more conscious about your spending. When you take out a loan, you will have to plan your finances better. Planning will ensure your financial stability after paying your EMIs. Additionally, it will help you to actively learn about your spending habits and investments.  

 Fast Access to Funds

One of the biggest advantages of taking a Personal Loan is its instant approval and disbursal of funds. Even though you might have money saved, some emergencies can deplete your savings. In such cases, a Personal Loan helps you cover immediate costs. By taking a loan, you will not be left vulnerable by depleting your savings.

Additionally, many lending institutes have digitised their platforms, creating a hassle-free experience for loan applications. Digitalisation allows you to take a loan online and get the funds instantly.

Cons of Taking a Personal Loan

High-Interest Rates

Personal Loans have relatively higher interest rates, especially if you have a low credit score. Similarly, other factors, such as loan tenure, income, etc., directly impact interest rate. Moreover, interest rates are bound to fluctuate depending on the changing economic conditions. In such a case, you might fall into a debt trap and end up borrowing more than you intend to.

Strict Eligibility Requirements

Eligibility requirements differ from lender to lender. However, very few lenders lend money to individuals with a low credit score or a short credit history. Additionally, your income, collateral value, employment status, age, and capital greatly determine your loan approval. Some lenders require co-signers to pledge responsibility in case of possible loan default. To know if you qualify for a Personal Loan, check the eligibility criteria of your lender.

 Affects Credit Score

A Personal Loan affects your credit score in various ways. Your credit score considers factors such as your payment history, amounts owed, new credit, credit mix, etc. Failure to make timely payments can lower your credit score. Additionally, it may also increase your debt-to-income ratio. To avoid such a situation, you must keep track of your credit behaviour and credit score by self-checking your score at regular intervals of time.

Long-Term Commitment

A Personal Loan could be difficult to repay for individuals with fluctuating incomes or someone self-employed with an unstable income. You shouldn’t opt for long-term commitment or longer loan tenure, as it can be risky if you have an unstable income.

Pros of Using Savings

Interest-Free

By using savings, you can save your money, otherwise paid on interest. Additionally, other than the interest rate, you will also be saving money on processing fees and additional charges.

Stress-Free

When you are using savings, credit scores become irrelevant to you. You do not have to worry about late payments affecting your credit score. You also need not stress about low credit scores affecting your future borrowing ability. Moreover, there’s no need to worry about repayment.

Investment Opportunities

 You can earn on your savings by investing it in stocks, SIPs, or an FD. You can also buy gold or real estate to increase your savings. Consult a financial advisor to find the best investment opportunity that suits your financial needs.

Cons of Using Savings

Limits Your Affordability

You can only afford to spend the amount of money you have saved. In such a situation, it will restrict your spending as you cannot spend more than your savings. It can result in losing the opportunity to purchase a good car or a house.   Moreover, if an emergency requires higher spending, relying on savings may not be enough.

Savings May Take Time

You are likely to have savings in the form of fixed deposits, shares, mutual funds, and more. Along with it, saving also takes time. If you urgently need funds, dissolving these savings may not be fast and convenient. In such situations, a Personal Loan may come handy when you lack liquidity.

Disrupts Long-Term Financial Plans

There may be situations that can deplete your entire savings. Such cases may disrupt your financial planning and budgeting. For example, you are saving to buy a new car, but a sudden requirement needs your immediate financial attention. Such a scenario may disrupt your long-term financial plans.

Which One is Better - Using Savings or Taking a Loan?

As mentioned earlier, no one-size-fits-all policy for using savings or taking a loan exists. While some consider taking a loan riskier and prefer to use savings, others find it financially beneficial to take a loan.

For either of the cases, you need to have a clear financial strategy and check on your savings, interest rates, income, and funding options available to decide that best suits your interests.

Also Read - 6 Easy Ways To Pay Off Your Loans Quickly

Conclusion

Both taking a loan and using savings have their own pros and cons. In comparison, savings may seem safer than a Personal Loan. A Personal Loan is an excellent option if you are in dire need of funds. Weigh your options before deciding on one to ensure that you still maintain your financial health. Hence, financial planning can help you decide.

Frequently Asked Questions

  • Is it good to take a loan or not?

Taking a loan has both pros and cons. For example, taking a loan can prove beneficial when you don’t want to deplete your savings. On the other hand, it can affect your finances if you already have a high amount of debt.

  • Is taking a Personal Loan risky?

Taking a loan can be risky if your debt-to-income ratio is high and you find it difficult to make monthly repayments. However, you can reduce the risk if you have a low debt-to-income ratio and are financially responsible.

  • What happens when a loan goes bad?

 A loan goes bad when there is no payment by the borrower. It can fall into civil crime. The lender may send debt collection agents and can file a case against the borrower. A lender can also seize your pledged collateral. A delay in payment can also affect your credit score and chances of future borrowing.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

We are a team of expert writers and editors passionate about providing our readers with authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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