For small purchases, this question does not even arise. No need to take a credit to buy a telephone, for example. However, the task becomes more complicated as soon as you make a large purchase. For purchases of real estate, cars or professional investments, this question is very often of current interest. So savings or credit?
One is not a spender, one knows how to control a budget, better still, one has a rather considerable financial reserve. But one wants to buy a new car because the one that one uses is already old enough, or one simply wants to buy a new one. One can also want to buy new real estate or simply to do the work in one’s house.
One may also want to open one’s own company or business. It is common that one changes completely the profession. Even though you have savings, one doesn’t ask oneself whether it is reasonable to take out a credit or whether one should rely only on these savings.
Usually, this question is asked in two cases. First, although the savings are huge, they are not enough to make the purchase. Second, they are enough, but we fear finding ourselves without financial support.
To answer this question, certain factors need to be analyzed.
- Was the expense incurred a simple outlay or a long-term investment?
- By spending one’s savings, is it urgently needed in the short and medium term?
- Is it possible to make similar savings in the medium and long term?
- If it is a simple expenditure, is it crucial? Can we do without it or postpone it?
Only after answering these questions can we move on to the next step.
It all depends on the type of purchase and the circumstances in which you find yourself.
Starting a Business
If the sum of the savings is equal or inferior to the sum of the investments to be made, it makes sense to resort to a loan. The savings here play the role of a guarantee for both the creditor and the borrower. However, it is important to keep in mind that the amount of credit, and the interest rate, must remain reasonable. It is advisable never to take more than twice the amount of your savings.
If the amount of savings is much greater than the amount of investment, credit should be avoided. Taking credit in these circumstances is a waste of money, since you will have to pay interest rates.
Purchasing Real Estate
The right question here is whether this purchase represents an investment. Let’s suppose that we want to buy a property that will be immediately put up for rent. Whether one has good savings, you can afford to take out credit. The savings will serve as a financial cushion, while the money from the rental of the purchased property will help pay off the debt.
If it is a personal asset, for example, the home in which you intend to live with your family, the option of credit is only to be under two conditions:
- The sum of the savings is less than the price of the property to be gained;
- The sum of the savings is equal to the sum of the property to be purchased, but one intends to make any investments. Here, the savings serve as insurance in case the creditor gets into financial difficulties. The savings should help the creditor manage the payment of his debt.
- Consumption credit
Here, the decision-making is relatively easy. If the savings are at least equal to the amount of credit to be taken, it is to be avoided. If the amount of savings is less than the amount of the purchase, it is better to take minimal credit and use it, anyway. This approach may seem unreasonable, but it is only on the surface. It is more psychological than a practical matter. In fact, when you take credit with savings, especially if they are large, the tendency is to get carried away. After taking this credit, one may be tempted to take immediately another one on the assumption that one has savings, and this without considering the fact that these reserves already serve as a guarantee for several previous credits. Using a savings account in this case allows the creditor to be grounded.