Is it better to pay off my debt or grow my savings? We asked the experts!
Do you owe unpaid debts? You’d prefer to see your debt go, regardless of whether it’s a personal, credit card, or home loan.
The question is: Is it still a good idea for you to prioritize your debt rather than focusing on increasing your savings? Can we do both?
Mozo’s banking expert Peter Marshall consulted Sebastian Paulin (direct lending manager at Plenti) and Joanne Edwards (risk and data manager at Wisr). We have the answers, boy!
What should I do if I want to pay off my debts or put some money aside?
It all depends on your financial situation. Sebastian Paulin de Plenti says there is no “perfect” formula.
We all know that saving money can be difficult. Paulin says that it can feel like you’re taking two steps back when you have to balance your existing debt with savings plans.
Prepaying debt is a popular option for borrowers who have enough income to live comfortably and still have some disposable income. These borrowers can choose to prioritize their extra income in a variety of ways. Others may decide to repay their savings only when they have extra cash and make steady progress with loan repayments. Some may choose to deleverage to feel more financially free and be able to save more.
Paulin suggests that borrowers assess their savings and their ability to repay debt quickly to decide what priority is.
Here’s an example
Let’s say you have a personal mortgage amounting to $ 15,000 for three years. The interest rate is 7% per year. This would mean that your monthly payments would be $ 463, you would pay $ 100 less each month to the loan, and you’d be able to pay off the loan six months sooner.
If you were to put $ 100 each month into a savings account with a 1% interest rate, you would have only earned $ 53 over three years.
“The interest rates that you can get on a term deposit or savings account are often lower than those you pay on a personal loan. If this is the case, it’s better to pay off a personal loan or something else. Marshall says that you should save money in interest accounts and take out another loan.
“It is a good idea also to have emergency savings account in case of unexpected costs.”
How to Prioritize Debt Improves Credit Score
Credit reporters love it when you pay off your debts early. A healthy credit score will make you more attractive to future lenders. This means that you have a better chance of getting a lower rate when you next borrow.
How can you predict your chances of getting a great deal on your next loan?” Joanne Edwards of Wisr says that your credit score is the key.
A credit score is a measure of financial health. It includes information about your financial history, including bills, credit cards, and missed payments. Higher credit scores are better for borrowing money. They could also help you get approval from the best lenders or receive lower interest rates.
How can you get rid of your debt faster?
A debt consolidation loan may be the right loan for you if you have multiple loans or credit cards.
No matter how much you have spent, simplify your debts so that you can pay them off as soon and as efficiently as possible. Edwards suggests asking yourself whether consolidating all your debts into one will help you save money and make your payments on time.
A debt consolidation loan allows you to combine multiple debts such as credit cards and personal loans into one loan. The interest rate is typically lower than the minimum one of the separate debts. This allows the borrower to make monthly payments.
These loans can give borrowers an advantage in loan repayments and often allow loans to be paid off quicker with lower interest rates. If borrowers want to extend their loan term, they can opt for a longer repayment term (five years). This will allow them to save money and build savings while still repaying the loan. Paulin says that debt is a problem.
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What’s the problem with early repayment?
Marshall explained that prepaying your debt is a good idea, but it’s important not to overlook the additional costs of loan products if you make additional contributions.
Lenders sometimes charge customers fees for additional repayments, such as personal loans or home loans. These products can also impose prepayment penalties on borrowers who pay all their debts in advance. This can lead to a steep cost of hundreds of dollars.
When you think about prepaying your debt, you must be aware of all costs. It’s because if you end spending more on fees than you are saving in interest, it’s probably not worth it.
It is a fact that being a good saver can make a big difference.
Paulin explains that saving money is important.
It allows you to have more security in your life, and it improves your financial health. He says that if you save money for an emergency, there is always another option if something happens.
You might be wondering how you can save money.
Paulin advises concentrating on building good money habits. He suggests automating your debt payments and not spending if you don’t have enough.
He says, “It’s not the big things that make the difference.” “Digital tools and apps can also be used to determine where you are at the moment.
Check out our loan center if you are looking for more options or additional advice.
* DISCLAIMER* The Comparison Rate is a combination of the interest rate, fees, and charges of the lender to give an accurate estimate of the cost of a personal loan. Based on monthly repayments, the comparison rates are calculated using a $30,000 loan for five years and a $ 10,000 loan for three years. Principal and interest on secured loans and unsecured loans on an unsecured basis. This rate is only applicable to the given an example. Different terms and amounts will have different compare rates. The loan’s cost may be affected by costs such as prepayment or redemption charges and cost savings like fee waivers.
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