3 Times Taking on Debt Might Be Better Than Draining Your Savings

by Elizabeth Aldrich | Updated July 25, 2021 - First published on March 11, 2021

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Don't get stuck without cash when you need it most.

Avoiding debt is often touted as a top financial priority -- and for good reason. With debt looming over your head, it can be hard to get ahead and start planning for the future, especially if you're trying to keep up with snowballing interest fees.

If you can afford to pay for something in cash, it's almost always better to do that than take out a loan or run up a credit card balance. However, here are three times when it might be smart to keep that money in your savings instead.

1. You qualify for a very low interest rate

Low interest rates mean it's cheaper for you to borrow money. When this is the case, it can be advantageous to do that and keep your cash reserves intact.

For example, car loans can come with interest rates as low as 3% or even lower. If you take out a $10,000 loan at that rate and pay it off in three years, you'll end up paying about $470 in interest fees. If the alternative is draining your savings, it might be better to eat the interest fees so that you maintain access to cash in case of emergency.

Even though interest rates can range anywhere from 6% to 30%, some people would rather take out a personal loan than have to worry about having an empty bank account. Keep in mind that higher interest rates will result in hefty monthly payments, and falling behind on those payments can wreck your finances.

What qualifies as a low interest rate depends on your situation. Do the math on any loan or credit card to make sure you're comfortable with the monthly payments and interest charges.

2. You have a 0% APR offer and plan to pay it off on time

If you have good credit, it's not hard to find a good 0% APR credit card nowadays. These credit cards can offer you incredible flexibility in your budget. They give you a certain period of time to pay off your balance interest free -- usually anywhere from 12 to 20 months.

If you need to make a big purchase, it might be preferable to take advantage of one of these offers rather than dipping into your savings. This is particularly true if you don't have much saved up. For example, if you have a bare bones emergency fund, (say, $500 or one to three months' worth of living expenses saved up), draining it could leave you in a sticky financial situation down the road.

You do have to pay off your credit card balance in full before the promotional period ends to avoid interest. These cards tend to come with very high regular APRs, so if you still have a balance when that happens, you could face some pretty large interest fees. Make sure you never miss a minimum monthly payment, or you could lose the 0% APR offer.

3. You're facing an uncertain future

It's a good idea to bulk up your cash reserves for difficult times. Keeping extra padding in your emergency savings will give you a little more cushion to land on if you end up with a big unexpected bill.

However, this is only worth it if you can borrow money at a reasonable rate. Taking on high-interest debt will only make troubling financial times even more stressful, and if you're only able to make the minimum monthly payment, you could be in debt for decades.

For example, if you run up a $10,000 balance on a credit card with an 18% interest rate and only make the minimum monthly payment, it would take you over 18 years to pay off that balance. You'd end up spending nearly $20,000 on interest -- twice what you borrowed.

If you're facing expenses your savings won't cover, make sure to consider all your options rather than jumping on the first loan or credit card you qualify for. Credit unions tend to offer great rates on both loans and credit cards, and if you don't have the best credit score, they might be more willing to work with you if you've built a positive banking relationship with them.

Even a difference of 1% can mean hundreds of dollars in savings when it comes to paying interest. While borrowing money makes the most sense sometimes, it should never be taken lightly.

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