Saving vs. repaying debt - any help please?

timmah86

I'm 26 years old. I have about 17k in savings, in an ISA that earns 3.05%. I bought a car recently with a loan for £9k, at a rate of 6.3% or so for 5 years, and pay £175/month for that. I earn around £1900 a month net and after rent & bills (including the car repayment) I have about £1250 left. I spend about £500/month on food/stuff/fun.

I'm aiming to save about £25,000 (or really as much as possible) to put a deposit down on a house.

My question is this - is it better to keep the savings I have & add to them to get to my target, or repay the £8500 or so that's left of the car loan and save the monthly repayment amount?

Benefits of this would obviously be that I save some money on the interest of the car loan, but the negative would be that I lost 9k out of my savings and it would take a while to get back to where I was, especially with the limit of £5640 (or whatever it is) that there is on adding to ISAs per year.

Alternatively I could repay say double the amount on the car per month and reduce the interest accrued on it.

What should I do? Any thoughts much appreciated!

bigadaj

I'd pay the car loan off now as this immediately saves you money.

Even if your savings then exceed the isa allowance the savings in interests are likely to outweigh the tax you pay on savings.

Keep checking your isa rate as these are constantly dropping, and moving to new issues is often the only wa of maximising returns.

AlwaysLearnin

While you're paying debt at a higher rate than you are getting on savings, you're losing money.

As balance though, that's not a bad rate for a cash ISA in today's climate; one which you probably won't see again for a little while. Depends how long left you've got it for, but *might* be worth keeping it.

If it works out better not to use the ISA money, why are you only looking to double the debt payment? Why not pay it off as quickly as possible using your monthly surplus, then once it's gone start putting it in savings again?

sharpe106

pay of the debt as quick as you can, this will cost you far more in the long run

atush

Why borrow at twice your savings rate? Madness, pay it off either monthly with every penny spare, or via the cash.

Your net worth (ie what you can spend on your deposit) is the savings minus the debt in any calculations so you are not keeping an extra 8.5K in your savings pot by keeping the debt.