Is it Better to Save or Repay Debt?

If we have loans and savings, then we might wonder whether it is good to have both, better to have more savings and build those up or better to repay the loans and not have so many savings. It is well worth thinking about this and most people will tend to have some money saved and some loans, so they could be in this sort of dilemma. It is good to think through the decision.

Compare the costs

It is good idea to start by looking at the cost of the loan. If you have a loan you will normally be charged interest on it. This means that you will be charged for borrowing the money and this will usually just be a percentage but might include a fee as well. It is good to make of note of how much you are being charged. Do this for each loan that you have. Then do the same for savings. Of course, you will not be being charged money for keeping savings, but you will hopefully be being paid some interest in them. Take a look at how much that is as well. Then compare this with the amount that you are paying in interest on the loan. You will normally find that the interest that you are paying on the loan will be significantly higher than the amount of money that you are getting on your savings. So, if you used your savings to repay the loan, you will save a lot of money.

However, you do need to be aware that some lenders will charge you if you repay the loan early. This means that you should check and see if this is the case with yours. Some will not charge at all but some could charge thousands of pounds, particularly if you are thinking of repaying your fixed rate mortgage early. Make sure that you check this because this cost could be so high, that you might find it is better for you to actually not repay it as you will be financially worse off.

Consider what the savings are for

It is also worth noting what you are actually saving for. It is important to think about whether the worth of that money is more than paying off the loan. It is a very personal thing though. You need to consider the cost of keeping the savings compared to that of the loan in a financial sense as well as an emotional sense. If the money is there to fall back on, then consider whether you might have other options. If you have a credit card or overdraft facility then you might be able to use these if you need money to fall back on, if you do not have enough money in the future. Hopefully you will not need this anyway. If you are saving money for a specific item, then think about whether it might be better to repay the loans and then save up for the item. Once your loans are repaid, you will have a lot more money available to save as you will not be paying out interest or loan repayments and it may not take you that long to accumulate some money to be able to save up for that item.

It is not an easy decision to make and it can be hard work to save money and using it to repay a debt can sometimes seem like you are getting nothing in return. However, think about the amount of money you are making by doing this – calculate the amount of interest you will no longer have to pay as a result of repaying the debt and this should help to motivate you.

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