Pay your debt or save your cash?

I’ve had a few letters and calls from people with money in the bank and a personal loan, credit card, or mortgage that they are repaying. Their question is ‘should I use my savings to repay my loan, or should I keep my savings and continue to repay my loan every month?’

My answer usually start with two words ‘It depends’!

It depends on what interest rate you are paying on the money you have borrowed, and how it compares to the rate of interest you are getting on the money you are saving.

If you have £10,000 in a current account and your bank is paying you 0.1% interest on it but you have a credit card balance of £10,000 and you are being charged 30% APR on it then it doesn’t take a lot of thought to realise that you should be paying off the debt with the money in the bank.

But if your mortgage rate is 2.5% and you have some money in a Stocks and Shares ISA that returned 3% a year last year then it’s a much more difficult call.

Will your ISA grow at 3% this year as well? Will it grow at all? Is your mortgage on a fixed rate and so will you continue to pay 2.5% for the next few years or is it on a variable rate and might increase soon, perhaps to more than the 3% that you are getting as growth on your ISA at the moment.

More importantly for some people, how do you feel about debt? Does it matter if you owe money to your mortgage company? Can you afford the monthly payments, and this is a very good question at the moment with so many people seeing fluctuations in their income.

If you don’t like debt then you might repay the mortgage regardless of the questions above on rates of interest. It might be that the most important thing is to be debt-free, even if you could make more money by keeping the debt and investing your savings.

Sometimes money is more about psychology that hard cash!

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