Pay loan with ISA?

AJUK_3

Hi all

I am hoping someone can give me advice. I know it is supposed to be a no-brainer to pay off debt with savings. I am not sure how much I would save and I am scared I would not build up my savings again.

I have a cash ISA with about £11k in it (Interest rate about 0.5 above BOE rate). I have an outstanding loan for £10k with an interest rate of 6.3%.

I like the idea of having no debt and paying off the loan would certainly help me pay my bills month to month. But I know I would not be able to put anymore into my ISA than I do now so it will take me another 5 years to save that much...

Any thoughts?

AJ

~Beanie~

If you are paying more interest on your loan than you are earning in interest on your ISA then you should pay it off.

Once you have repaid the loan, why can't you put the amount that you were previously paying off it each month into your ISA?

TheKeyMaker

It’s not a straightforward call … the ISA keeps you psychologically fit to save, thus is very difficult to withdraw money – at least for some of us.
I am the opinion that worth paying a few more £ for rates difference, but you know that your ISA is there and keeps you somehow disciplined.

~Beanie~

TheKeyMaker wrote: »

It’s not a straightforward call … the ISA keeps you psychologically fit to save, thus is very difficult to withdraw money – at least for some of us.
I am the opinion that worth paying a few more £ for rates difference, but you know that your ISA is there and keeps you somehow disciplined.

Eh? Can you repeat that in english please? I don't understand

milliemonster

Are you saving for anything in particular?, obviously while interest rates are so low you are paying more interest on your loan than you are earning on your ISA, but it is sods law that if you pay off your loan, something will come up that you will need some money for and you won't have any so may be tempted to borrow again?

I appreciate this is a no brainer really but it's always worthwhile having a little bit put by in case of emergencies, what about compromising and saving a little longer into your ISA (say when you get to about £13k) by then your loan should be maybe £9.5k and you can pay it off then and still have a few ££££ left?, that's probably what I would do, but maybe not the best financial advice!

CLAPTON

The way you can look at it is this

If you had no debts and no savings
would you take out a loan for say 5k
then save it because you a bit put by in case of emergencies.
I doubt if any reasonable person would do this (I'm excluding businesses that might well need a float ).

roxalana

Perhaps do a little of both - don't use all your savings to pay off the loan so you retain some savings to keep you in the habit of saving (and just in case something crops up) but still end up better off because of the different interest rates.

Have a think how much of an emergency fund you need and also check your loan T & C's to see if there is any penalty for repaying early (sometimes you have to leave at least 1 or more normal payments to go in order to avoid charges).

sdooley

At the very least stop paying into your ISA and make overpayments on your loan. Every extra £ paid off on your loan is in effect tax-free savings for you and when you have paid it off quicker than before (especially if you use the trick of using half of any pay-rise as additional repayment) then you can start adding to your ISA again.

In normal times would say pay off your loan with your ISA but at the moment that could be the money you need to tide you over if the worst happened with work.

militantconsumer

Don't forget that the interest on the built up ISA savings is TAX FREE FOREVER (or until the government abolishes ISAs)

If you decide to withdraw it then you will only be able to build it up again by £3,600 per year at current rates - i.e. over 3 years. So after 3 years the maximum you could have in an ISA is £10,800. But if you leave it in and manage to keep saving you could build it up to £21,800 - PLUS 3 YEARS OF TAX FREE INTEREST ON THE ORIGINAL £11,000.

If you are considering paying off the loan early, have you checked whether there are any penalties for paying it off sooner than agreed - i.e. would you actually save the interest or get charged an extra fee?

If you find that you are allowed to pay if off early maybe you could balance transfer it to a lower or zero rate?

While you are at it, is your ISA with the top paying rate or could you do an ISA transfer??

AJUK_3

Thanks for all your help. I think I will leave my ISA where it is but stop paying in for awhile while I try to pay down my loan. The interest rate on the loan isn't that bad and the rate on my ISA is ok - although I might have a look and see if there is a better one out there!

TheKeyMaker

~Beanie~ wrote: »

Eh? Can you repeat that in english please? I don't understand

I mean: Keep the ISA !