How to Use Your Savings Account to Repay Personal Loans
Personal loans are a type of credit, in general, that falls under the consumer loan category, which consists of: secured, unsecured, and short-term loans. Secured credit is used to purchase a car or home, and the purchased item will then become your collateral. This type of advance typically has a lower interest rate when compared to the others due to the low risk associated with it. Unsecured, on the other hand, requires no item to be attached to it, but the interest rate is much higher. Same deal with short-term credit-the interest rate is higher because the repayment period is shorter. In addition, the maximum amount you can borrow is limited.
Early Repayment is Important
From recreational use to financing a new car, there are many reasons why people take out personal loans with a bank. Before you go borrowing, though, it is best to make sure you are capable of repaying it. The longer it takes for you to repay, the more that you will pay in interest over that period of time. Therefore, the ultimate way to reduce the cost of your credit is early re-payment. Just keep in mind that some advances have a penalty for early repayment. When selecting, read the fine print and look for the words ‘no early repayment penalties apply.’ If not, then you’ll need to calculate the amount you’ll be paying in early repayment fees compared to the interest payments that will be incurred over the length of the loan. If the former is lower, then early repayment is the better option for you.
Savings Account and Emergency Funds
When paying back a debt, it is always viable to look at your doormat cash first. After all, it is very hard to build a savings account when you have personal loans, right? However, do not completely drain your savings account to do this. Here are a few steps you should consider before using your savings account to repay your personal debt.
1. Do you have an emergency fund? In today’s economy, it is best to have a six-month emergency fund in place just in case you lose your job or become sick.
2. Prioritize which debts need to be paid off first. Credit cards, in general, have the highest interest rate. They should be paid off first.
3. Long-term advances, such as student or home mortgages, should be looked at next, as they have lower interest rates. Find out how much you will pay in interest by calculating how much will incur over time. Then, calculate how much you can save in interest by increasing your payments.
A general rule of thumb when it comes to saving vs. paying off debt is this: Very rarely will you be able to earn more on your savings, than you will pay on borrowed money. Therefore, paying off debt will save you more money in the long run than placing your extra cash in a savings account.