Saving Money vs. Borrowing for a Large Purchase

The question of how to pay for a large purchase is tied to a series of either/or choices. Cash or credit? Save or borrow? Now or later? Many people believe they should save up before buying to avoid debt. Unfortunately, experts say there is actually no easy, one-size-fits-all answer to the cash-versus-credit question.

Saving up to buy a big-screen television or washing machine often makes sense, because by not going into debt you avoid interest that adds to the item's bottom-line price. But what if you need that washing machine right away because your current one just broke down? What if after a year of saving, the washing machine has gone up in price more than the interest you would have paid to charge it? What if the washing machine is on sale, and the store's offering no money down and zero percent interest for 12 months?

Reasons to Pay Cash

Sometimes people are forced to wait until they can buy something outright because their financial situation won’t allow them to take on more debt. But even if you can finance a sizeable purchase, it may be better to put it off until you have the money in hand.

Saving up and paying cash may make it possible to negotiate a better price for a non-emergency big-ticket item. “Cash upfront” is a tried-and-true bargaining tool with a long history. Although savings account interest rates are not particularly attractive at this time, any interest coming in is better than interest going out, making saving at least modestly preferable to going into debt. And with big-ticket items, like a car or a house, saving for a down payment (or a bigger down payment), allows you to get a smaller loan and reduce the overall cost of borrowing.

Reasons to Borrow

There are, of course, times when it makes sense to go into debt. One of the most common reasons, mentioned above, is urgency. If an appliance fails, you need a replacement right away. So, if you don’t have sufficient savings to buy it outright, debt may be your best option.

A pending price increase or special sales opportunity—even when it’s something that isn’t an emergency need—could also push you into a decision to charge the item. It’s important to make sure that, once interest is figured in, the savings of this financed purchase still amounts to more than the savings you would realize by waiting until you could pay cash.

When a purchase represents something that will likely appreciate in value, buying now and going into debt might make sense. Examples would include paying for college or buying a home. The same would apply if you decided to borrow funds, instead withdrawing them from investments, savings, or a retirement account. In those cases, long-term gains on investment or savings, not to mention the potential damage to a retirement account, often make borrowing a better option.

During periods of extremely low interest rates, buying on time may be a better choice. This is especially true if you feel interest rates might take a significant hike before you are able to save up enough to make the purchase. Just be aware that if it's a credit card you're using, its annual percentage rate of interest probably is in the double digits—so, not all that low.

The Charge-It-and-Pay-It-Off Option

There is one way to have the best of both worlds. That’s when you charge a large purchase on a credit card, then pay it off immediately or within a specified promotional interest time range. You may get rewards, in the form of bonus airline miles or points or even cash back. These could represent an additional discount, and you would still avoid paying interest.

Credit cards typically feature extended product warranties, travel insurance, or other consumer protection benefits. If you charge the purchase and immediately pay it off, you get the benefits for free.

When Credit Becomes Suffocating Debt

It’s important not to max out credit cards or accounts. Late fees, over-limit fees, and other costs can quickly wipe out the advantage of any savings. Don’t fall into the trap of failing to honor your plan to pay off a large charge because you want to accommodate another big purchase. This is how access to credit can quickly become suffocating debt.

Make sure you actually have enough in the bank to pay off the balance by the end of the month or the end of the zero percent interest period. If you can’t do that, avoid charging the purchase.

The Bottom Line

When deciding whether to save or borrow, start by asking yourself how quickly you need the item. If it’s not an emergency, saving up is often the best option. If it is an emergency, review your borrowing options and choose the one that costs the least. If it’s not an emergency, but you’ve concluded that buying on time makes sense for one of the reasons listed in this article, double-check to make sure you are right before proceeding.

Finally, especially when contemplating going into debt, make sure you have a plan for paying off that debt if the unforeseen happens, such as a cut in take-home pay or losing your job.