Do I take out a loan to keep as an emergency fund?

Hickory_Dickory · 25 May 2018 at 10:00PM

I'd really appreciate some perspective please.

My partner and I have a mortgage and the deal expires in a year so we will need to remortgage.

I applied for a loan for 7.5k (for home improvements). Whilst awaiting acceptance we mentioned this to partners mother who said she would lend us the money herself at 0% over 5 years. We have just received confirmation that the loan application has been accepted at 3.04% APR with repayments at around £166.

I am weighing up the possibility of using both loans and here's my thinking:
In Jan our financial situation eases drastically as our childcare fees drop by £350 a month. My partner has just started a new job and is on a reduced wage for 6 months then after training goes up in pay by approx £200 a month. Until then finances are exact/tight.

We have no money in an emergency fund. Would it be crazy to put the 7.5k into premium bonds so that we can't touch it easily and could pay off the loan over the agreed period so we would then have an emergency fund in case of illness, boiler breakdown or whatever?

Whilst we could save money gradually ourselves from Jan it means we would gradually build emergency money but not for some time.

Also I am concerned loan rates will go up and given that this one is at a low APR if I applied for a loan in a year or two I may find rates have shot up and I'd kick myself.

I do realise this may seem crazy to some people but I hope my thinking makes sense. Would appreciate observations/experiences. Thanks

DCFC79 · 25 May 2018 at 10:07PM

I find it an odd idea to get a loan and stash it away.

Id be wary of borrowing money form the partners mother, it could turn nasty if the 2 of you ever breakup.

Dobbibill · 25 May 2018 at 10:16PM

Any lending you have will reduce your amount of borrowing on a mortgage.

If you are perceived as a risk, the rate will reflect it.

To take on an additional unnecessary commitment and risk a worse rate on the mortgage would be madness.

When your situation changes in the next few months, make it a priority to get an emergency fund behind you. In the meantime, put a little away if possible and pray you don't need it sooner.

enthusiasticsaver · 26 May 2018 at 3:11AM

Taking out a loan just in case it might be needed for an emergency is not a good idea. You will be paying interest on it, it will be seen as a financial commitment which may affect your remortgage and your monthly disposable income will be affected.

Regardless of whether or not you take your mother in laws offer of a 0% loan it seems unwise to me to take on any extra commitment when your partner is dropping his wage significantly. Can the improvements not wait until your financial position is better?

badmemory · 26 May 2018 at 4:14AM

If you can afford to pay back 2 loans then you should have been or at least be able to save. Unless the home improvements are vital then they can wait. A loan to have an emergency fund - well you are a newbie so - I think you need to rethink. Also owing money to friends and family often does not end well for either side.

She is not offering so that you can double the loan, she is offering so that her's will be the only loan. Taking both would be taking advantage of her good nature & when she finds out, which she will, it will not end well.

dealer_wins · 26 May 2018 at 7:43AM

I wouldnt even be doing home improvements until I had an emergency fund saved up, let alone considering 2 loans.

What if your situation changes suddenly?

D_M_E · 26 May 2018 at 10:36AM

Save the monthly laon repayments into a savings account instead of taking out the loan.

You will be paying out more in interest on the loan than what you would get in the vast majority of savings accounts, and there is always the temptation of using a large sum sitting there waiting to be spent/frittered away leaving nothing for an actual emergency.

Hickory_Dickory · 26 May 2018 at 10:38AM

Thanks all. Yes the home improvements are needed (we bought the house for much needed space but can't use 2 rooms until repairs are done on them & we have some plumbing work which is essential). The whole house needs a huge amount of cosmetic work but we realise we need to gradually chip away at that and just accept it will take time

You're very right. It would (understandably) cause huge bad feeling with mother in law.

I needed some perspective and your posts have all given me a reality check. Thank you. Have ripped up the loan agreement which arrived yesterday.

I agree borrowing from family can cause issues but in this situation it is unavoidable for the repairs due as it's either that or pay more by way of interest. When we bought the house we had 10k put by for the necessary work and some left for emergencies then in typical fashion more work was needed than indicated in the survey, also boiler broke twice and costs have drastically escalated. It's why I am conscious we need to rebuild an emergency fund and I will prioritise that with any spare money.

Thank you

Ben8282 · 26 May 2018 at 11:36PM

As a precaution, I would suggest that you leave your partner to discuss things with his/her mother and that when the money is handed over it is paid to your partner and not to you and you personally distance yourself from it as much as you can.
I would be inclined to recommend against taking out the other loan. Perhaps an extra unused credit card would be a better idea to keep for emergencies or else you could also consider mother in law again if a real genuine emergency should arise.

dresdendave · 27 May 2018 at 7:40AM

I second Ben's suggestion for getting a credit card for emergency use. The available limit on the card would in effect be your emergency fund until you build one with your savings. Perhaps use the card for a nominal purchase each month to keep it active, having also set up a pay in full DD.

Just make sure the CC is only used for a genuine emergency, such as unexpected car repair bill, not for new outfit for friend's wedding or suchlike!

ViolaLass · 27 May 2018 at 10:14AM

Hickory_Dickory wrote: »

T

I agree borrowing from family can cause issues but in this situation it is unavoidable for the repairs due as it's either that or pay more by way of interest.

That's not unavoidable, that's a choice.

Do I take out a loan to keep as an emergency fund?

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