Paying Off Debt With Savings – Is It Worth it?
Most people would prefer to keep savings or continue, to pay into savings, rather than service their own debt. I’m not talking about paying into an emergency fund, but actually having money in a normal savings accounts, earning little to no interest. This may be alongside paying a higher interest rate in debt than they’re realistically making saving. So, the question is – should we be using savings to pay off out debts?
Just to hammer home this message, I am not talking about emergency funds, but just normal savings accounts.
According to the Centre for Economics and Business Research (Cebr) for Shawbrook Bank, the average interest on a loan is 7.0% and yet the highest savings interest is barely over 1%*. So why are people continuing to keep savings or paying into savings when it would save them more money to pay off their debt? *As of June 2020.
Let’s use an example to show: If you had a loan of £10,000 at a 7% interest rate and then had 60 months left to pay. And you also had £10,000 in savings that you paid off your loan with, you would save a whopping £1819.94.
This is effectively giving yourself a pay rise for just being smart with your money. You could also look to getting another quote on your loan which may mean you can get a lower interest rate.
Although the interest rate the bank gives you will never be as low than the one they give your savings accounts, it could mean you’re happier to keep your savings – and pay the debt off like normal, as the interest is now lower and therefore less of a squeeze on your pocket.
Using Savings To Finally End The Debt Cycle
Financial expert Martin Lewis says “The right thing to do is still pay off your debts with savings, including your emergency fund. Yet don’t cut up your credit cards, it’s important to keep the credit available in case of a substantial emergency (and substantial means just that, your roof falls in or you can’t feed the kids; not a new plasma TV).”
Obviously, what you have to consider is if you do pay off your debt with your non emergency savings, and then need to re-borrow cash – will you be given another loan? You can know this by constantly checking your credit score, and making sure you are building good credit.
Everyone wants to make the most out of their money, and make it stretch the furthest. You can only make the right decision for yourself, but paying off debt with savings can be a really swift way of saving on expenses, and cutting your debt.
REMEMBER: Do an eligibility soft check to see what you can get so you don’t have a hard search inquiry on your credit score.
Most people are very comfortable when they have savings and therefore never think about saving the money in the short/long term by servicing their debts with their savings.
If you’re a person that wants to be financially independent and not tied to debt then using your savings might be a good financial strategy for yourself.
If you’re someone that likes to have savings secured and don’t mind paying the interest. Maybe you could decide to pay a % of your savings onto your debt, and then re-consolidate your loan at a lower interest rate due to the loan amount being lower. Thus saving you money and saving you interest paid out.
Remember to only consider this if you have no large payments coming up, as it’s always better to have money in the bank if you need it!
What do you guys think? Should you keep on saving, or use the savings to attack the highest interest rates – let us know in the comments below!