Why You Should Save Instead of Getting a Loan

Oct 31

Although loans might seem like an attractive option when you are in a pinch, it is always better to go the saving route in order to handle short-term funding needs. Loans typically come with high interest rates, with how high those interest rates go depending heavily upon your credit history with most lenders. Saving money over time provides you with a number of benefits over loans, while allowing you to avoid some of the common headaches that many experience. Placing a small percentage of each paycheck into a savings account may not have the same positive effect on your credit as repaying a loan would, but may allow you to protect your credit during tough times in the future.

Safety Net

Perhaps the biggest benefit that saving money provides you is the fact that you have a constant safety net that will allow you to have access to direly needed short-term funds. Are you behind on the bills? Do you have a huge bill to pay to a car mechanic in order to get you back on the road, and allow you to drive to work? These are common situations in which a healthy amount of savings would cover, without having to take on all of the interest payments that come with the loan.

There is no way to account for every financial hardship you will run into throughout your life, and having a well-funded savings account can grant you access to quick, interest-free funds that can help you to get through a tough financial situation, while still offering you the flexibility to take on loans where it is financially feasible for you.

Protect Your Credit

Relying solely on loans during hard financial times could potentially place you in a catch-22. On one hand, you need a solid credit history in order to be able to receive a loan from a lending institution. On the other, if you are unable to pay your loan or other bills, you can damage your credit, leaving you unable to be approved for future loans and receive access to short-term funds. This leaves you without a proper savings account, and without access to a loan, which can place you in a very precarious financial situation.

Having a healthy amount of money in your savings accounts ensures that you will be able to take care of these issues as they arise, without needing approval from a bank or lender. This allows you to meet your financial obligations and protect your credit in the long term.

Reduce Stress

Those that take on loans in order to meet immediate obligations (and not for long-term investments or purchases) often place themselves in a stressful situation. If you did not have the funds to handle the expenses when you applied for the loan, the amount that you owe has not changed, and in fact, grows due to interest rates. In essence, you have elected to put off the payment of the debt into the future, and have agreed to pay a larger amount as a result. This can be a stressful situation for anyone to place themselves in.

Having a saving account with a large amount of money in it allows you to handle unforeseen short-term expenses easily, and reduces the stress of knowing that you have shifted your debt to your lender. Although it does take some financial discipline to place a portion of your weekly paycheck into a savings account, it allows you to take care of short term expenses without issue, and also use those funds for long term investments. In almost all circumstances using your savings will be more advantageous than taking out a loan.

Author Bio: Betty Newman works at FastCash a website that contains articles about the quick loan business.