Pay off that loan before you focus on saving
I have € 3,000 left on a personal loan that ends at the end of 2020 with bimonthly euro repayments with an interest of 6.7%. Would I do better to clear this loan now with the savings I have accumulated or wait until the end of 2020?
Mr DG, e-mail
Neither a lender nor a borrower goes the old maxim. And, indeed, until very recently most people – by choice or not – would save until they had the cost of whatever they wanted and then buy it.
The main reason you pay off a loan over its lifetime is to build a credit history. This is more relevant, in general, for young people who have never used bank loans and for whom a credit history may be advantageous if they need to apply for more financing, especially a mortgage.
Of course, the ability to save is also a valuable asset, especially in the eyes of lenders who want to know that you have the discipline to put some of your income aside even if you are not under pressure to pay. outstanding debt to do so. And, of course, if you plan to go for a mortgage down the line, Central Bank rules will require you to have a minimum deposit of 10% of the property’s value, so getting into the habit of saving is. always a good idea.
However, all that being said, there is very little value in paying too much for the privilege.
You’ll almost always pay more for a consumer loan than you get in interest on your savings – unless you’re very adventurous with those savings and lucky on top of that. On this basis, it is almost always advantageous to speed up loan repayments.
You say you pay 6.7%. 100 on the loan. It’s a cost to you. Unless your savings are more than that after tax, you are costing yourself unnecessary money.
So unless these savings are intended for other purposes and are needed in the short term in addition to your existing financial commitments, pay off the loan. You will be better.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice.