Should you use credit or pay with savings?

By Harper Banks

After many hours of deliberation, you decide that you want to purchase a bicycle. But now you need to figure out whether you should pay for it with your savings, or buy it on credit.

We have a look at which option makes the most financial sense, and we consider two factors that may influence your decision.

Tip: Don’t get into more debt when you’re already struggling – opt for debt consolidation instead.

Buy on credit or dig into savings?

Ester Ochse, product head of Money Management at FNB, points out that savings rates are the lowest they’ve been in years, with savings of less than R10,000 attracting roughly 2.5% interest. Loan interest is also much lower than it was pre-Covid, but still averages at 12.75%.

“If you have money in savings, it makes financial sense to use those funds rather than going into debt. However, it’s a balancing act to keep some funds available in case of an emergency,” she says.

Hayley Parry, money coach and facilitator at 1Life’s Truth About Money, believes that, in general, you should always buy items with money you have, rather than borrowing. This, she says, will enable you to pay what the item is worth and not a cent more.

She explains that buying on credit means that you not only pay for the item, you pay a lot more than this in interest over the loan period.

“You’re only going to earn a finite amount of money in your lifetime. It’s your responsibility to make your money work for you and not the other way round,” says Parry.

She explains that one of the best ways to do this is to put money aside each month so that when you want or need to buy something, you can use your own reserves.

Is the purchase a want, or need?

Unfortunately, if you’re one of the many South Africans who have been struggling financially, you’re unlikely to be left with sufficient savings to fund your purchase. According to Ochse, whether or not you choose to buy on credit will depend on how urgent your need for the item is.

If, to use our example, you’d like to buy a bicycle purely for leisure purposes, and it’s not an immediate concern, saving would be the better option, she says.  

“If, however, you need to purchase the item to help you get to work, or if you plan to start a side hustle that will generate future income, then you could consider purchasing on credit,” says Ochse.  

“Have a look at various options and loans. Be sure to use a reputable institution or financial service provider, and pay the loan off soon as possible.”

As regards the item, Ochse advises that you shop around, and see whether a loyalty programme can cover some of the costs.

“Do also take into consideration the future costs that will arise, such as insurance and maintenance. These add up and it’s good to have the funds on hand should an expected or unexpected need arise,” says Ochse.

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