Pay Off Debts With Savings Article Discussion Area

Ridmeofdebt

Ridmeofdebt wrote: »

I have just been to the bank and cleared the Car loan. I am now on a roll.
Total debt left is now £1764.15
Total savings is now £292.51

Still feel weird that I have done this but I know I am doing the right thing.:eek:

I left a very stressful job with a good salary and am now on a small wage but other than a £47000 mortgage debt I am debt-free. I don't class my mortgage as debt as it is an investment but I am hoping to get rid of it in the next 6 years. I am much happier and don't intend to get into any major debt again.

Happy Days

imnothere7

I have been tying myself in knots over this! I would be grateful for some input.


I currently have a personal loan with £10,538 outstanding - 2.8% APR and 42 monthly repayments left. I will incur total interest of about £525 over the remaining loan term which averages out at a cost of £12.50/month over the remaining loan term.


I have enough in savings to repay the loan in full. There is no early repayment fee/penalty.


My savings account which has a similar amount in it gives me 1.5% interest (I have other savings elsewhere as a safety net which I do not wish to touch and earn far more interest). The savings account is giving me interest of about £13/month.


According to the article, I should use these savings to repay the debt in full as the loan rate is far higher than the savings rate BUT I'm actually earning marginally more money from the interest in my savings (which will continue to grow as keep putting more in it) compared to the average cost of the loan so this is confusing me a lot!


Please help!

Willing2Learn

imnothere7 wrote: »

I have been tying myself in knots over this! I would be grateful for some input.


I currently have a personal loan with £10,538 outstanding - 2.8% APR and 42 monthly repayments left. I will incur total interest of about £525 over the remaining loan term which averages out at a cost of £12.50/month over the remaining loan term.


I have enough in savings to repay the loan in full. There is no early repayment fee/penalty.


My savings account which has a similar amount in it gives me 1.5% interest (I have other savings elsewhere as a safety net which I do not wish to touch and earn far more interest). The savings account is giving me interest of about £13/month.


According to the article, I should use these savings to repay the debt in full as the loan rate is far higher than the savings rate BUT I'm actually earning marginally more money from the interest in my savings (which will continue to grow as keep putting more in it) compared to the average cost of the loan so this is confusing me a lot!

If your savings APR is greater than the loan APR (2.8%), then you would save most money by keeping your savings intact.
However,
If your savings APR is less than the loan APR, then I recommend you clear the loan using your savings.

imnothere7

Willing2Learn wrote: »

If your savings APR is greater than the loan APR (2.8%), then you would save most money by keeping your savings intact.
However,
If your savings APR is less than the loan APR, then I recommend you clear the loan using your savings.

Thanks for your reply. I understand the logic of what you’ve said but on a monetary basis I make marginally more over the remaining loan term by keeping my savings despite it having a lower APR - as per the figures I gave in my initial post. This is what is confusing me and I’d appreciate if someone would clear this up for me?

eskbanker

imnothere7 wrote: »

Thanks for your reply. I understand the logic of what you’ve said but on a monetary basis I make marginally more over the remaining loan term by keeping my savings despite it having a lower APR - as per the figures I gave in my initial post. This is what is confusing me and I’d appreciate if someone would clear this up for me?

The bit you're missing is the money you'd be using to repay the loan capital, which will be about £250 per month. If you pay off the loan with your savings then you'd be putting this monthly amount back into your savings account for the remaining 42 month term, where it would earn interest at 1.5%, or possibly more if you use regular saver accounts....

getmore4less

The calculations are wrong if the higher rate is costing less than the interest on the same amount saved.

YOU CAN'T use average interest on the debt as the interest drops as the amount borrowed goes down.

£10k at 2.8% is costing £23pm not £12.

imnothere7

eskbanker wrote: »

The bit you're missing is the money you'd be using to repay the loan capital, which will be about £250 per month. If you pay off the loan with your savings then you'd be putting this monthly amount back into your savings account for the remaining 42 month term, where it would earn interest at 1.5%, or possibly more if you use regular saver accounts....

Thank you! This was so simple but I did the classic overthinking it. This clears it up completely for me.

getmore4less wrote: »

The calculations are wrong if the higher rate is costing less than the interest on the same amount saved.

YOU CAN'T use average interest on the debt as the interest drops as the amount borrowed goes down.

£10k at 2.8% is costing £23pm not £12.

Sorry but this wasn’t any help at all. The average interest figure I quoted already factored in a decreasing amount of interest on a month by month basis. Someone else has cleared it up for me anyway thanks.