When to use Savings to Pay off Your Loans

If you owe money then you may be advised to use your savings to pay off the loans. This can make sense but some people will be reluctant to do so. It is worth giving it some thought with regards to your own personal situation.

It is worth starting by looking at the loans that you have and how much you are paying for them. If you have overdrafts, credit cards or same day loans, then they are likely to be quite expensive (although there are interest free ones which are available). Take a look at how much you are paying with regards to interest rates and then look at the amount that you are getting on your savings. If you are paying out more money on your loans compared to what you are getting on your savings, then it makes financial sense to pay back the loan with the money that you have in your savings account.

It is difficult for some people to part with their savings though as it can take a lot of hard work and commitment to save up. It may be that the money is being saved towards a specific thing, perhaps a holiday, occasion or something for the home. If you have been doing this, then parting with that money to pay a loan and then having to start saving up all over again can be really hard. It is worth though looking at how much you are paying out each month on interest on those loans and see whether you are prepared to continue doing that and paying that price for having those savings.

You may think that the savings give you something to fall back and you will be right. However, if you pay off the loan, you could potentially use another loan to fall back on, maybe a credit card or overdraft, perhaps. This is not ideal of course, it is much better to build up your savings and use those and hopefully manage your money so that you are not in this situation. However, sometimes we get ourselves into situations where we struggle financially, sometimes our own fault and often not our own fault and so we have to rely on things like this to help us.

If you want to get out of debt fast, then using your savings to pay it off or some of it off makes total sense. You may just think that you should get on and do it. However, there may be something that will hold you back. Sometimes a loan will have an early redemption fee. That means that you have to pay a fee for paying it off early. It could be a small amount, perhaps just a month’s payment or even less, but sometimes it can be larger. It is worth checking out how much it is so that you can calculate whether it really will be cheaper for you to pay it off early or not. If you work out how much you will pay in interest over the remaining term then you will be able to know whether it will be cheaper to pay it off or not.

Of course, your reasons for wanting to pay it off may not be purely financial. You may dislike having a debt hanging over you and want to get it cleared. You may feel that you want to move on and be debt free and therefore you will do anything for this regardless of whether it costs you more money.

So it is worth giving this situation some thought. Consider the costs of paying off the loan early and how much money you will save compared with keeping you savings or whether in fact it will cost you more money. Think about how you feel about the savings and the debt. Does the debt worry you and would you rather be rid of it or do you feel it is fine paying extra for the debt because you want to have those savings that you have worked so long for. It can be a hard decision and it is worth thinking about all of the different options available and the costs as well as your emotions to decide what to do for the best.

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