Save Money or Pay off Debt?


Several loans can quickly affect a household's budget.

But for an individual, is it more viable to repay his credit or to put his cash in a savings accounts? This question arises when borrowers benefit from an exceptional cash flow such as an inheritance or another (often unexpected) gain of money. With today's regulated savings, which hardly flirts with the 1% mark, investments will not always be attractive. For a borrower, the desire to pay off a credit card may appear as the best solution ...

Paying off Loans Early - A good idea but beware of penalties

Above all, you should know that the full pay-off of a mortgage or car loan is possible. This is provided in the contract signed by the borrowers. Nevertheless, this clause is subject to condition. Indeed, for the bank the early repayment of a loan will limit the collection of interest. It is well known, the longer the loans are, the more interest paid to the bank, and the more revenue/profit made by the bank.

But by paying off the loan early, the bank is missing part of its profit. The loan agreement therefore provides for early repayment benefits (IRA). They are also called prepayment penalties (PRA). This clause therefore provides that the borrower will pay a certain sum if he decides to repay all the capital. However, the amount of the benefits is regulated by law. The amount of the IRA cannot exceed 6 months of interest on the capital already repaid. In addition, it provides that this sum cannot be greater than 3% of the outstanding capital.

Is the loan recent or old?

At the time of choosing between saving or repaying one's credit cards or loans, one must also take into account another parameter: you pay more interest at the beginning than at the end of the loan. Over the monthly repayment, the share dedicated to interest shrinks while that devoted to the principal balance increases. It is therefore more interesting to repay a recent loan rather than an older loan. Translation: Pay off or pay down loans that are still in the first third of the borrowing period.

Beyond that, it will be necessary to engage in meticulous calculations to obtain the gain, or the losses, on the financing transaction and its early repayment.

Finally, a last parameter must be taken into account, a mortgage is usually covered by a borrower insurance. In the event of the death or disability of the latter, the insurance covers the monthly repayments. In the case of an acquisition of real estate, the owner enjoys the property. With his insurance borrower, he is adorned with all contingencies and protects his investment and his family. Should we then mobilize a substantial sum if the reimbursement does not weigh heavily on a household budget? The answer is therefore specific to each and every indebtedness situation.

Why should we think about paying off credit cards?

If the money can be used to finance a new project but the amount is insufficient to carry out work or the purchase of a car, it may be interesting to consolidate the existing credit cards. With a repurchase of credit, current loans are grouped together in a single financing whose amount can integrate the new need. A banking intermediary will be able to bring you all the necessary information on this operation. The specialized website also offers a free simulation of the amount of the new monthly payment.