Handling the finances is a herculean task that takes a lot of effort, discipline and time. Today everything requires a high capital whether it’s purchasing a new home or going for higher studies. These are just the planned expenses which you can pay through your saving account or FD account but the main problem arises with the unplanned expenses like paying the hospital bills. In such a case, some may opt for personal loans while some use their savings. But how to choose what is the best course of action?
Let’s understand the pros and cons of loans and savings to choose the right option when needed:
Pros of using the savings:
- Free from interest:
If you have enough savings then you are lucky that you will not have to pay loan interest.
- Keeps you stress-free:
Spending from your savings can prevent the prolonged tension and stress that comes to pay back the loan. People who are bad in handling their finances can fall into the debt trap if they are not careful enough with the borrowing. So for them, it’s ideal that they spend on what they can truly afford.
- No use of credit scores:
It doesn’t matter what your credit history is if you are paying from your savings for any purchase or bill payment. However, with loans, condition is different as banks need the borrowers to maintain a healthy credit score.
Cons of using the Savings:
- Limits the affordability:
One of the biggest cons of using saving is that a person can only spend the amount that s/he has saved. So if an emergency lands, sometimes savings will not be enough.
- Liquidity accessibility:
The majority of people don’t keep their savings in a liquid form so when needed, it takes little time to convert them into money.
Pros of taking a loan:
- Reduces the tax burden:
Some loans such as
home loans come with tax benefits so a person can save money on tax while taking a loan.
- Financial discipline:
To pay the loan amount, one needs to be disciplined which in the long run can become a good habit.
Cons of taking a loan:
- The burden of EMI:
Loan has to be paid with EMI and your part of income is diverted to pay EMI which doesn’t feel right.
- Interest rates can increase:
Banks change their interest rates according to the RBI guidelines and policies. Therefore, a person may end up paying more interest than planned.
Both savings and loans have their
advantages and disadvantages. However, to pick one, you need to take your financial condition under consideration.
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