If you need to make a major purchase, like buying a car, getting new furniture, or replacing an appliance, you might be wondering if it’s better to save up or take out a loan. The saving vs. borrowing debate is often a normal part of healthy money management. While there’s no one-size-fits-all solution, answering a few questions can help you make the best choice.

1. Do you really need it?

The answer to this question might seem obvious. And yet it’s not uncommon to make a large purchase without actually considering whether you need it. For instance, if your family is growing, you may need a bigger car. That makes sense and is a necessity.  On the other hand, you might be considering getting new living room furniture to replace your current, usable furniture – which is really a non-essential purchase. Asking yourself if it’s something you really need can help you evaluate your priorities.

If your purchase is non-essential, it could be worth saving up for – but not worth taking out a loan to get it

2. Is the purchase time-sensitive?

Replacing a broken washing machine might be a time-sensitive purchase because you need it to wash your clothes and may not have the option or time to go to a laundromat. Conversely, something like a new TV can probably wait.

However, the urgency of some large purchases isn’t always so obvious. Take the above example of getting a bigger vehicle to accommodate a growing family. While you may eventually need a larger car, you might be able to realistically hold off for a while – giving you more time to save. Of course, this will depend on timing and other factors of your unique situation.

3. How long will it take you to save up?

The time it takes to save up for a substantial purchase depends on your income, current expenses, and diligence. We recommend figuring out how much you can put toward your goal each month and calculating how long it will take you to get there. This timeframe can be factored into the time-sensitivity of your purchase and help you determine your best course of action.

Check out our easy savings calculator to see how long it will take you to save up.

4. Can you afford the loan payments?

If you’re leaning toward borrowing the money, the most crucial consideration is whether you can afford the monthly loan payments. Affordable loan payments should be about the same or lower than the amount you could feasibly save each month. If the figure is higher, you may want to reconsider.

Accepting the terms of a loan is easy to do, especially when you’re excited about a big purchase. But it’s a significant commitment. You’ll have to repay the funds plus interest within a specified timeframe, and defaulting on payments can hurt your credit score and affect your long-term financial wellness. If you’re unsure of your ability to afford payments throughout the life of a loan, paying cash for large purchases is probably your safest bet.

5. How long will it take you to pay off the loan?

Aside from budgeting for loan payments, you’ll want to consider how long it’ll take you to pay it off in full. You might be able to afford payments now, but will that be the case in one or two years? How about four years? Bear in mind that a sizable loan payment could impact your financial freedom in the future.

Also, the need to make other large purchases over the next few years, a shift in personal expenses, or a drop in income could affect your ability to stay current on the loan. For example, you may need to lease a new car, afford childcare, or pay more in rent down the road. When reviewing the terms of a loan, be sure to factor in all potential expenses and changes to your income.

The bottom line on saving money vs. taking loan for a large purchase

Here at Patelco Credit Union, we’re committed to supporting your financial wellness and helping you make good money choices. Whether you opt to save up for a major purchase or decide on borrowing the funds, we can assist.

In deciding whether to take out a loan or save up, you’ll need to balance your need (or want) for the item versus the timing of saving. The questions above can help you evaluate that, but here’s the bottom line: Will the monthly payments be affordable and about the same (or less) than the amount you could save each month?

If you’re still unsure, we encourage you to schedule a complimentary appointment with a Certified Financial Specialist at your local Patelco branch.