Savings Versus Early Loan Repayments – Which is Best?

If you have some spare money it can sometimes be hard to know what to do with it. You may feel secure putting it in a savings account so that you have it to fall back on, but it could save you money if you use it towards paying off a loan. So how do you decide which is the right thing to do?

Your decision may be influenced by how much money you have to play with. If you have a large sum of money you may be able to pay off the debt and have some left to save as well. It is more likely that you will have to choose between them though. A small sum of money may not be worth saving as it will not make a big difference if you need money in an emergency but paying some off loan will mean that your interest will be reduced and the loan will be cheaper. A larger sum could be split with some saved and some put on the loan, but it depends on how you feel and whether peace of mind of having savings is more important than the savings that you will make in interest on the loan and the fact that you will be closer to paying it off will be an advantage as well.

The difference between interest rates could be a factor as well. If your loan is really expensive then you might be more motivated to get it paid off as quickly as possible rather than save the money in an account with a low interest rate. However, if the savings account interest is pretty high and the loan is cheap then it may not make such a big difference. Some lenders will charge you if you want to pay a loan off early. This might make it too expensive to consider doing this and you may decide that it is not financially viable. Some lenders may only allow you to pay a loan off early in a lump sum rather than a series of overpayments so you may need to save up the money anyway, before paying off the loan.

You may decide you want to keep some savings to stop you having to borrow more money should you get short. Although this seems to make logical sense, it can be better to pay back the loan and see what happens. If you are careful, it is likely that you will not need to borrow any extra money anyway and you will benefit from having paid off some of the loan.

Paying off some of your loan can help your credit record but having savings will not make a difference to it. This means that if you want to improve your credit report, perhaps because you want to borrow money for a mortgage or something like that, then paying off the debt can be the best way to do this. Paying it off early should be a big advantage with this. It will also enable you to pay out less each month as once the loan is paid off you will no longer have to make monthly repayments. This may allow you to save up for things rather than borrow or save up for a deposit if you are buying a home.

So if the cost is the main factor for you, then paying off a loan is usually better than putting the money in a savings account. The exception to this is when the lender charges a high amount to make overpayments or when the loan is cheap and savings pay high interest. It is worth calculating the costs so that you can work out which will be the best. If you find it hard to work out or are not aware of all of the options available then it could be wise to talk to a financial advisor as they will be able to identify the best options with regards to cost.

If there are other factors that matter more than cost or as much, then you need to consider those a swell. Think about the peace of mind of having savings versus the peace of mind of paying back a loan, for example. Consider the difference it could make to your credit rating and how you will be able to afford more things once the loan is paid off.

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