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Loans vs saving: what to consider before a purchase

If your heart is set on buying an expensive new toy, whether it be a new car or caravan, the big question is: should you save or borrow?

On the one hand, saving is a debt-free way of reaching your goal. But on the other, taking out a loan is a faster way of enjoying yourself sooner.

Before weighing up the pros and cons, there are some important factors to consider. The first is, do you really need this expensive item? And secondly, can you afford it?

ME Head of Deposits and Transactional Banking Nicolas Emery says if saving for a big-ticket item is not an option and you are considering borrowing, ensure you can make the repayments.

“If you buy luxuries now, how much longer will it take to achieve your long-term savings?” he says.

“It’s good practice to save before buying an item and consider borrowing only if you really need to. There will be times when financing a big-ticket item is the only way to purchase what you need, such as education, a car or house for example.”

The major advantage of borrowing money is to seize an opportunity quickly. Emery says if credit is used to fund your education or start a business, it can also help you reach your financial goals sooner.

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Consider all factors before committing to a large investment

On the downside, taking out a loan comes with interest and this needs to be budgeted for.

Yet there are ways to have the best of both worlds. Set yourself a savings goal and once you’ve reached this, consider applying for a loan for the remaining money needed. This method reduces the overall amount you would have borrowed from the outset. It also sets you up with good saving habits that ease you into making loan repayments.

Alternatively, if you arrange to take out a loan and set yourself up to make extra repayments. It helps reduce the length of the loan period and pay off debt faster, says Emery.

“There are some clever ways to make extra repayments,” he says.

“Use windfalls like a tax refund to make a lump sum payment. Round your regular repayments up to the nearest hundred or get into the habit of collecting spare change and deposit the money into your loan account.

“It all boosts your overall savings.”

For those looking for somewhere to grow their savings, the ME Online Savings Account currently offers a variable base rate of 2.5 per cent per annum, plus for four months on balances up to 250K, a savings plus bonus rate at 1.35 per cent per annum.

The bonus rate is available to those who open their first Online Savings Account before 1 May 2015, and within the first 14 days link it to an ME EveryDay Transaction Account by making the ME EveryDay Transaction Account the nominated account.


This content was sponsored by ME. Conditions, fees and charges apply. Consider if these products are appropriate for you. For more information, go to mebank.com.au or click the logo below:

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