Should You Borrow or Save for a Big Purchase?

Couple looking at fridge

Pay now or pay later. If only the decision on how to cover certain costs was that simple. While saving six months to purchase a big-screen television might be a no-brainer, saving for larger expenses is a different story. It's often easier to pay for big-ticket items, like hotel and airfare to attend your cousin's destination wedding, with a credit card or loan. But that debt could interfere with other financial goals, like saving for a new home or boosting your retirement portfolio.

Here are five questions to ask yourself when deciding whether to borrow or save money for your next big purchase.

1. What is the cost of borrowing?

Unless you plan on completely paying off borrowed funds by the first payment due date, factor interest charges and any fees into the total repayment amount. Generally, the longer you take to pay off the debt, the higher the cost of borrowing. 

Be realistic about the repayment timeframe. The lender or credit card company should disclose the total amount you'll end up paying based on your estimated repayment timeline. Paying substantially more than the value of an item that will quickly depreciate or have no lasting value can harm your finances. 

2. Do I have enough time to save for the expense?

If the expense isn't tied to a specific event or deadline, setting aside money for a future purchase could save you money. You won't have to pay interest charges or fees. And depending on the account used to build your savings, you might earn dividends on your deposits.

3. How's my credit score?

Whether borrowing is a good option has a lot to do with your credit health. If you have good credit, you might use a zero introductory rate credit card to cover the expense. As long as you pay off the balance before the zero percent period ends, you could borrow the funds for free. 

But, if you have poor credit and little disposable income available each month, borrowing money could send you into a financial tailspin. A few late or missed payments could further damage your credit. In addition, late payment fees and high interest rate charges could grow the debt and make it difficult to pay off in a timely manner. 

4. Will the purchase interfere with my long-term financial goals?

Large purchases that have the potential to sidetrack retirement or college savings goals should give you pause. For example, financing a new model electric car right now might not be the best move if you'll be paying for college in the next two years. Review your long-term financial goals to determine how satisfying a desire today could negatively affect your financial future.

5. Is the expense a necessity?

If you need to replace a major appliance, such as a refrigerator, waiting until you have enough money saved to cover the cost, might not be practical. For example, if you know it will take you 12 months to save for a new refrigerator and it's on sale at a store offering no money down and no interest for the first 12 months, then it makes sense to finance the purchase.

Whether you decide to take out a loan, use a credit card, or save enough cash to cover your next purchase, thoughtful planning is key to maintaining solid financial footing. If you borrow funds, ensure you budget for a speedy repayment to avoid lingering debt. If you have time to save for the purchase, trim expenses or work a side job to help reach your goal sooner.