Pay off that loan before you focus on saving

Q&A: Dominic Coyle

You will almost always be paying more for a consumer loan than you will be getting by way of interest on your nest egg.

You will almost always be paying more for a consumer loan than you will be getting by way of interest on your nest egg.

 

I have €3,000 left on a personal loan that ends at the end of 2020 with fortnightly repayments of euro with interest of 6.7 per cent. Would I be better to clear this loan now with savings I have accumulated or wait till the end of 2020?

Mr D.G., email

Neither a lender nor a borrower be goes the old maxim. And, indeed, until very recently most people – by choice or otherwise – saved until they had the cost of whatever it was they wanted and then purchased it.

The main reason for paying out a loan along its full term is to build up a credit history. This is most relevant, generally, to young people who have not previously dealt with bank borrowings and for whom a credit history can be advantageous should they need to apply for more significant finance, notably a mortgage.

Of course, the ability to save is also a valued asset, especially in the eyes of lenders who want to know that you have the discipline to set part of your earnings aside even when not under pressure from outstanding debt to do so. And, of course, if you are looking at applying for a mortgage down the line, Central Bank rules will require you to have a minimum deposit of 10 per cent of the property value so getting into the habit of saving is always a good idea.

However, all that being said, there is very little value in paying over the top for the privilege.

You will almost always be paying more for a consumer loan than you will be getting by way of interest on your savings – unless you are very adventurous with those savings, and lucky to boot. On that basis, it almost always pays to accelerate payments of a loan.

You say you are paying 6.7 per cent on the loan. That’s a cost to you. Unless your savings are making more than that after tax, then you are costing yourself money unnecessarily.

So, unless these savings are pencilled in for some other purpose and will be required in the short term alongside your existing financial commitments, pay off the loan. You’ll be better off.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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