If we have some savings or are in a position where we could put some money into a savings account but we have loans, then we may wonder whether we should be saving the money or repaying the loans. It can be a tricky decision and it is worth taking time to think about what might work the best for you.
Advantages of saving money
Having some money in a savings account can give us a sense of security. Knowing that you have something there in case you need it can make a big difference to us. If something breaks down and we need to find the money to replace it; knowing the money is there can give us peace of mind. If we find a good savings account, we will also get interest on the money. This will give us a little bit of an incentive for saving money and will mean that it will not lose value so quickly with inflation.
If we spend less money on objects it means that we will have less things to fill out homes with. This can be good because we will not need such a large house or not feel so cluttered by the items we have. Often, we will have a sort out every so often and get rid of a lot of our possessions because we no longer want them anymore. If we had not bought them in the first place we would have not had to go through this process and would still have the money available to spend on other things or in our savings account. We will also be being kinder to the environment if we buy less things.
Advantages of repaying debt
If you have loans, then repaying them can save you money. This will depend on the type of loan and how much it is costing you. It is therefore wise to find out about how much you are paying for the loans that you have in interest and charges. You may find that some lenders will charge you if you repay the loan early though. It is good to look into this so that you can calculate whether it is still worth repaying it early. Some may just charge a small administration fee, but some may charge a lot more. You will need to find out how much the fee will be and see how that compares to repaying the loan over the agreed term at the rate that they charge. If you have multiple loans then you may find that some have a fee and some do not. This means that you will be able to pick the ones without a fee to repay.
As you pay interest on the loan all the time that you have it, repaying it early will save you a lot of money. Even if you just repay some of it, it means that there will be less money to charge interest on and so you will pay less. Even though you will not have so much money to spend or save if you repay the loan with your money, it means that in the long term you will be better off. Once you are free of loans, you will no longer be paying interest and have all of that money available to you to spend instead.
Working out which is best for you
All of us are different in how much we earn, what we owe and how we feel about spending and saving. It is probably most sensible to repay our debts rather than put money into a savings account unless we have such high charges for this that it makes us worse off. However, we may not want to do this and may think that paying the fees for the loans will be better than going without this money. The secure feeling of knowing that we have some funds behind us can be better than repaying the loan even though it is more expensive.
We might also be saving up for something specific and we might be really looking forward to it. It could be anything from a new car to a holiday and the thought of having to go without that just so that we can repay some of our loan can be hard. It is worth thinking about the advantages and disadvantages to you. Do the maths and calculate how much money you will save and work out whether you think that it will be worth keeping the savings and having what you want from those or whether you would rather save the money that you are paying in interest and pay off some or all of the loan. It can be a difficult decision as it is often not just a logical one. You might save money repaying a loan but if you want the savings to take your children on holiday they will miss out. So, you need to think carefully about which option will be the best for you.