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Saving vs Managed Loan
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At the moment I have a professional studies loan that I have been paying off since I graduated. At first I paid the minimum £150.74 a month, and saved a little more for car repairs etc. Then I came across the MSE site and took the advice of clearing loans before saving.
However I recently took up a new (better paid) job and get paid a car allowance. I now pay £200 a month back and I paid off £1,000 as lump sum last month. When I pay my professional studies loan off I am probably going to get another loan for a new car. I will use the £200 (that won't be paying off my loan now) plus my car allowance to pay off the new loan.
My question is: Is this a sensible idea? The advice on the site says pay off debts first before saving. However if I get a new loan for a car and pay off that I will never save. If then in 4/5 years time I want a new car again, I would have to get another loan.
I am in a small quandry about what to do now. If I take a new loan I could still save for a house deposit etc, but this goes against the advice of clearing debt first.
However I recently took up a new (better paid) job and get paid a car allowance. I now pay £200 a month back and I paid off £1,000 as lump sum last month. When I pay my professional studies loan off I am probably going to get another loan for a new car. I will use the £200 (that won't be paying off my loan now) plus my car allowance to pay off the new loan.
My question is: Is this a sensible idea? The advice on the site says pay off debts first before saving. However if I get a new loan for a car and pay off that I will never save. If then in 4/5 years time I want a new car again, I would have to get another loan.
I am in a small quandry about what to do now. If I take a new loan I could still save for a house deposit etc, but this goes against the advice of clearing debt first.
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Comments
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The pay off debts before saving rule applies to debts you have now, and then you don't replace them. Paying off debts and then borrowing again is the same as just having a long term debt.
So the idea is to pay off your debts now and then save for a better car. You get the benefit of interest on your savings rather than the bank getting the interest on you borrowings.
IE. If you save £4900 to buy a car you would have (say) £5000 with interest.
But if you borrow 5k to buy a car over 3 or 4 years you pay (say) £1000 interest.
So one way the car costs £4900, the other it costs £6000.
In the case of cars, if you replace the car every time you pay the loan off you continually have a 5k loan so you are permanently paying interest and decreasing your wealth.
This can be a bit of a vicious circle to break and the only way to do it is over time. Save what you can and keep your current car going as long as possible. When its time to replace it you use whatever savings you have available. Over time you should have more wealth because of not having debt and you can upgrade your car each time until you get the one you really want.
Regards
XXbigman's guide to a happy life.
Eat properly
Sleep properly
Save some money0
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