Most Filipinos are still averse to borrowing—this is the conclusion from a recent research by TransUnion Philippines. The study also found that most Filipinos would rather save and wait for their next big purchase rather than borrow money to fund it. In short, they would rather pay cash a year from now to buy something expensive than get it on credit today.
At face value, this may seem logical because, ideally, people should only buy things when they can afford them. However, borrowing money offers opportunities that many still do not realize.
A greater part of the population has been conditioned to view taking out loans as a negative habit. As a result, Filipinos are still conservative when it comes to using credit cards or borrowing money from a financial institution.
If not the stigma around loans, the potential interest rates often discourage borrowers. Additionally, some believe that it is a rabbit hole that will eventually bury them beneath too much debt. It is no wonder, therefore, that only a fifth of the population plans to borrow money or use a credit card in the upcoming months.
There is a glimmer of hope, however, as the majority of the respondents in the research are open to knowing more about credit-based products and their advantages.
Saving vs. Borrowing for large purchases: Which is more economical?
As prices keep increasing, more Filipinos are feeling the pinch and leaning towards saving as a smart move. In these times, borrowing money could alleviate some of the burden in many aspects of our lives. However, the stigma surrounding debt hangs over many people’s heads, and having to borrow funds for big purchases seems like a tricky business.
Below, we explore the benefits and downsides of saving as opposed to borrowing for significant purchases.
Saving money: The advantages
Saving money for large purchases makes sense for prudent people. Aside from this, it can also have many benefits and financial advantages. For instance, applying systematic savings helps you afford things easier over time.
This approach helps people get their desired items without the high interest and debt. In addition, many can also earn interest from their saved money if they put it in the right place. Saving also helps build a financial cushion, and it allows for flexibility in spending options. The more people save, the closer they are to financial security, independence, and confidence.
Lastly, saving helps individuals make more proactive and disciplined approaches to large purchases. This way, they are more likely to make informed decisions and have better control over their economic well-being. As a result, people who save before they make big purchases are less likely to incur excessive debt.
Saving money: The drawbacks
While saving money before making a large purchase is prudent, it comes with some drawbacks. First, people who keep their saved funds stagnant while waiting to purchase something lose the opportunity to earn from potential investments. This is also called the opportunity cost.
Next, relying on solely on savings to fund big purchases can mean losing out on favorable interest rates. Since the annual percentage rate usually fluctuates, financing big purchases can even help you save even with the added interest rate.
This is particularly relevant when considering significant expenses like buying a new car or a residential property, where financing options with low interest rates may be available. By solely relying on savings, you may also find it harder to build or improve your credit history, as responsibly managing and paying a loan impacts credit scores.
Borrowing money: The advantages
Borrowing money for expensive essentials has its advantages. In fact, financing is one of the common ways to fund pricey ventures and purchases such as higher education, cars, and houses. When applied responsibly, borrowing money can be a “good debt” that allows for greater financial flexibility and strategic wealth management.
Consider purchasing a new car where financing options help you spread the cost over manageable monthly payments. Similarly, securing a mortgage for your new home allows you to divide its cost over the years while the value of your property appreciates over time. In these cases, borrowing money is a good practice that preserves your immediate liquidity for other essential expenses.
When managed properly, borrowing money can even help you reach financial freedom faster. By strategically leveraging borrowed funds, you can reach life milestones faster, enhance your quality of life, and benefit from investment appreciation over time.
Borrowing money: The drawbacks
While borrowing money for significant purchases can provide immediate access to funds, it is not without drawbacks. One major concern that resonates with many Filipinos is the potential accumulation of “bad debt” when borrowing for purchases.
Aside from these financial anxieties, borrowing also poses the very real burden of interest rates, fees, and other costs. When all of these are compounded, it can significantly increase the price of your purchase.
The obligation to pay back borrowed money, often in monthly installments, can also strain financial resources, impacting your cash flow. These drawbacks, coupled with the added charges and ongoing repayment obligations, need a careful evaluation when you are planning to borrow for big purchases.
The bottom line
At the end of the day, the better choice between borrowing and saving for significant life investments requires careful consideration based on your financial standing. While saving promotes financial discipline and stability, strategically borrowing can unlock opportunities for achieving life goals without compromising your liquidity.
Thus, balancing upfront payments with savings against potential missed opportunities for financial growth and favorable financing terms is crucial. By understanding the impact of these factors on your income, ability to spend, and potential return on investment, you can make informed choices that align with your unique financial circumstances.
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