Saving or buying on credit – what makes more sense?

Asking if it’s better to save up for more costly purchases rather than buying them on credit is a bit like asking, ‘How long is a piece of string?’ There is no simple answer – it depends on your situation. Does it usually cost you more in the long run to buy on credit? Yes – but cost isn’t the only factor to consider. How urgently you need the item is also an important consideration.

Sometimes you’re faced with a situation that demands immediate action. Unexpected expenses or a cash crisis can strike without warning – that’s when a credit card or a personal loan can get you out of a jam. You can prepare for the unexpected to some extent by saving in an emergency fund every month, but if you don’t have enough saved when you need money urgently, credit can be a lifeline.

But what about planned expenses – products or experiences that you have your heart set on, but can’t afford right now? It’s always the less costly choice to save up for those, right? The answer is ‘probably’ – but you should take the effects of inflation and other factors into account.

The best way to illustrate this is to use a hypothetical example. Let’s assume you want to buy something worth R15,000, and you want to have paid for it within 3 years. Here’s how the numbers work out for 3 scenarios: taking out a personal loan, using your credit card, or saving up the money to pay cash.

Taking out a personal loan

The interest rate of the loan depends on your credit profile, but let’s assume you’re paying a fixed interest rate* of 18.25% for the duration of the loan and that you have also opted for credit life insurance. You can use our personal-loans calculator to adjust the loan amount, the interest rate and the repayment period to see how these will affect your monthly and total payments.

If you plan to pay off this loan over 3 years, you’ll pay about R725 a month, and it will cost you a total of just over R11,000 in interest and other costs. You can pay less interest by increasing your payments to reduce the loan period. By reducing your repayment period to 2 years, which would increase your monthly payments to around R925, your total costs amount to only around R8,000, saving you about R3,000.

Using your credit card

To simplify the cost of using your credit card, we’ll assume that you’re paying for the R15,000 purchase with your budget facility (so that your monthly repayments remain the same). Unlike a personal loan, the interest on your credit card does not remain fixed, but for this example we’re simplifying the calculations by using one interest rate over the repayment period.


The bottom line is that this is a personal decision, based on your individual circumstances


Credit card interest rates tend to be higher than those charged on personal loans, with our example calculated at 20% per year. If you take 3 years to pay back this debt, you will pay R560 every month, which includes interest of more than R5,100 in total. If you decided to pay the same R925 we used in our accelerated loan payment example, you’ll repay your credit card debt in 20 months. Doing so reduces the total interest payments to R3,500, a saving of around R1,600.

Note, however, that these numbers only hold true if you follow the good money habit of paying off the straight balance on your credit card in full every month during the interest-free grace period. If you pay only the minimum amount and leave a balance owing on your straight facility, you will be charged interest on that balance. Since the monthly budget payment added to your straight facility already has interest added to it, you’ll end up paying interest upon interest, which works out way more expensive.


Saving for 3 years

If you decide instead to save towards your goal that costs R15,000 today, what will it cost 3 years from now? The inflation rate changes constantly, but if we assume an average annual inflation rate of 4.5% (as experts predict for South Africa over the next few years), then a purchase worth R15,000 now will cost around R17,120 in 3 years’ time.

You can save that much easily by making monthly payments of R420.04 into a savings account earning between 5.7% and 7.25% interest per year, like a 32-day notice account. If you can afford to put away R925 a month, as in our other examples, you’ll reach the required amount in less than 18 months. Reaching your savings target earlier also means inflation has had less time to increase the original R15,000, and you’ll need only around R16,000 at that point, saving you another R1,000.

Cost isn’t the only factor to consider

Paying R925 a month on your credit card will clear the debt in 20 months, and paying the same amount monthly towards a R15,000 personal loan will pay it off in 24 months. The numbers make it clear: saving up for something costs less than buying it on credit, and you can save R15,000 faster than you can pay off a R15,000 debt.

However, our example ignores the possibility that high demand might cause a sharp rise in the price of the item while you’re saving, or that inflation might edge up to 6% or more, so you’d need to save more. We’ve also ignored personal priorities – if a new purchase will make your or your family’s lives better right now, and you can afford the R3,500 to R11,000 that credit will cost you, you might decide it’s worth the expense.

The bottom line is that this is a personal decision, based on your individual circumstances. Saving and investing for your future is always a good habit, but responsible use of affordable credit can get you what you need, when you need it. Striking the right balance between these options is a vital part of good financial management.

Learn more about Nedbank’s personal loans, credit cards and savings and investment options.

*Interest rates are subject to change, and the interest rate you could be offered depends on your personal risk profile.