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Savings to pay off loan

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  • 24-01-2009 11:26pm
    #1
    Random
    Closed Accounts Posts: 19,080 ✭✭✭✭


    Say I have a loan with the credit union for 3000.
    Say I have savings with the same credit union for 5000.

    Now, this wasn't always the case. I'm aware of the old rule of thumb where you shouldn't save if you have debts. It's simply a case that the loan amount has in the last few months gone below the savings amount as I have been paying off the loan each month and also saving each month.

    2 options here.
    1. Do I take 3k from the savings and pay off the loans and then just continue saving as normal - which leaves me with lower monthly outgoing but also lowers my savings.
    2. Do I just continue to pay off loan and boost savings as I have been doing - because credit unions prefer when you do this (so I'm told?).

    Any thoughts welcomed.

    * I only want peoples thoughts and experiences, I'm aware that I should go elsewhere for professional financial advice.

    Thanks


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    #2
    dolliemix
    Registered Users Posts: 4,048 ✭✭✭dolliemix


    I would have always thought it is better to clear all your debts if you can. Are you paying interest on your loan?


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    #3
    Ginger83
    Registered Users Posts: 3,504 ✭✭✭Ginger83


    Am in the same boat Random! Apart from my mortgage I have an 18k debt with my local credit union but have 12.5k in savings in a bank account.

    Just on an interest calculation I made up my mind to use my savings to cut 12.5k off my debt thus savings me approx 1950 euro on interest over the term of the credit union loan!

    PS: It is recommended to clear debts before saving but only use any savings you can afford to use to clear debts. ie: dont use money you might need for a rainy day, job loss, redundancy, knackered car etc.

    You know where I am coming from, if you clear your loan you will still have 2k in savings! A good idea would be to use the amount you would have paid off your loan to lodge into your savings. Best of luck!


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    #4
    IsThatSo?
    Closed Accounts Posts: 988 ✭✭✭IsThatSo?


    Traditionally the credit unions used to prefer that you saved and paid off your loan at the same time, not using the savings to pay off the loan. I think that may have changed in the last number of years as credit unions have become more "bank" like.

    Like a PP said, if you paid off the loan then use the amount to then top up your savings, so you would be back up to your 5k fairly quickly.

    Credit unions don't charge big interest on loans, but they don't pay big interest on savings either. What we did, in a similiar situation, was save the funds elsewhere while still continuing to save a certain amount with the CU. Then we will always have the fallback of getting a small loan from them if we need it as we will have maintained our track record of saving:)


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    #5
    GerardKeating
    Registered Users Posts: 7,650 ✭✭✭GerardKeating


    dolliemix wrote: »
    I would have always thought it is better to clear all your debts if you can. Are you paying interest on your loan?

    Depends on how deciplined one is. Some people are just bad savers.


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    #6
    Random
    Closed Accounts Posts: 19,080 ✭✭✭✭Random


    Still a little up in the air about what to do here.

    Currently it's about €200/month coming out of my current account toward loan payments to the CU alone. I also have money going into the savings account.

    Any more thoughts? Thanks


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    #7
    Blackjack
    Registered Users Posts: 3,612 ✭✭✭Blackjack


    Unless you're going to be in need of the 5000, pay off the loan and continue to save would be my advice.


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    #8
    jhegarty
    Registered Users Posts: 6,440 ✭✭✭jhegarty


    If the interest on the loan is more than the interest the saving then pay it off.


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    #9
    Random
    Closed Accounts Posts: 19,080 ✭✭✭✭Random


    Perhaps this is a stupid question ... but is it a good idea to ask the CU what they would suggest? Or are they just going to opt with whichever one makes them more money.

    I see all these ads these days about banks etc offering free advice etc etc.


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    #10
    Random
    Closed Accounts Posts: 19,080 ✭✭✭✭Random


    It just occurs to me that the savings are secured against the loan (or vice versa, however you say it).

    This essetially makes the savings that match the loan amount worthless to me anyway until the loan is paid off, right ?


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    #11
    BossArky
    Moderators, Arts Moderators, Recreation & Hobbies Moderators, Sports Moderators Posts: 9,521 Mod ✭✭✭✭BossArky


    How about paying off half of the loan now and then the rest in squal lump sums over the next 6 months?

    This way you won't be splurging all your savings at once and it will leave you feeling a bit more comfy as you are still holding back a bit of cash, whilst reducing your debt.


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    #12
    Random
    Closed Accounts Posts: 19,080 ✭✭✭✭Random


    Right .. I guess I'm leaning toward paying it off here since I started the thread. My reason for doing it would be:
    - reduce my monthly outgoing by about €200
    - the savings that I'm using to pay off the loan are worthless until the loan is repaid anyway, as they are secured on the loan.

    The only reasons I'm seeing for not paying off the loan with the savings is
    - I'll have more savings ..

    But I don't because of my point above

    Am I missing somethig obvious here?

    Thanks


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    #13
    IsThatSo?
    Closed Accounts Posts: 988 ✭✭✭IsThatSo?


    Nope, I think you have it in a nutshell.

    If you pay off the loan you could then put the €200 back to your savings. That way you would build up the savings again very quickly and be back to your original level of savings with no loan :)


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    #14
    johnnyskeleton
    Moderators, Entertainment Moderators, Politics Moderators Posts: 14,505 Mod ✭✭✭✭johnnyskeleton


    Random wrote: »
    Right .. I guess I'm leaning toward paying it off here since I started the thread. My reason for doing it would be:
    - reduce my monthly outgoing by about €200
    - the savings that I'm using to pay off the loan are worthless until the loan is repaid anyway, as they are secured on the loan.

    The only reasons I'm seeing for not paying off the loan with the savings is
    - I'll have more savings ..

    But I don't because of my point above

    Am I missing somethig obvious here?

    Thanks

    Look at it this way - if you pay off the loan they might give you another loan at a later stage if you really need it. So the money is still available (hopefully) if you need it.

    Put another way, you won't actually have more savings. Imagine I have no money and no debts. I take out a €50k loan and put it into a deposit account. I can then go around saying that I have €50k savings thinking that's great, but I really don't have anything and I'm losing money for the privilege of saying it.


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    #15
    blast05
    Closed Accounts Posts: 256 ✭✭blast05


    Am i missing something here ? Surely its as simple as if the interest rate on the loan is greater than the interest you are receiving on the money in your savings account minus DIRT then its a no brainer - pay it off.
    I have a similar situation - have an equity release from my house sitting on deposit earning a higher interest rate after DIRT than the mortgage rate i am paying. This has earned me approx 1500 a year for almost the last 2 years. If this goes below zero then i will be paying off a chunk of he mortagage


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    #16
    parsi
    Site Banned Posts: 5,904 ✭✭✭parsi


    Generally the CUs won't let you partially pay off a loan with your CU savings because they are a part of your security, however once your loan balance is less than your savings then you're good to go.

    It should be noted that your savings balance is now less and if you go for a loan then you may suffer as the CUs often give loans as multiples of your savings eg your 3rd loan can be three-times your savings.

    It's swings and roundabouts really. My view would be to clear debts but ensure that you continue saving.


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    #17
    Random
    Closed Accounts Posts: 19,080 ✭✭✭✭Random


    Not that anyone cares but just to bring the thread to a close.

    I decided to use the savings to pay off the loan and increase the savings amount monthly. This still comes in under what the I was paying a month with the loan/savings so it's reduced my monthly outgoings.


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    #18
    tony67
    Registered Users Posts: 23 ✭tony67


    Random wrote: »
    Say I have a loan with the credit union for 3000.
    Say I have savings with the same credit union for 5000.

    Now, this wasn't always the case. I'm aware of the old rule of thumb where you shouldn't save if you have debts. It's simply a case that the loan amount has in the last few months gone below the savings amount as I have been paying off the loan each month and also saving each month.

    2 options here.
    1. Do I take 3k from the savings and pay off the loans and then just continue saving as normal - which leaves me with lower monthly outgoing but also lowers my savings.
    2. Do I just continue to pay off loan and boost savings as I have been doing - because credit unions prefer when you do this (so I'm told?).

    Any thoughts welcomed.

    * I only want peoples thoughts and experiences, I'm aware that I should go elsewhere for professional financial advice.

    Thanks

    IMO your always better off clearing a loan with savings. Especially if its credit union loan/savings. With CU's your savings are collateral against any loan so in your example €3000 of your €5000 savings are collateral therefore you cannot access them. The interest you earn on said €3000 is not as much as the interest being charged on the €3000 loan. I was in exactly this situation several months ago and I cleared the loan then continued to saved what my repayments were plus what I was saving. Now I am debt free with savings almost equal to what I started with.

    To add to that I was let go in Jan and this decision has really worked to my advantage. Obviously saving has stopped but as I have quite small outgoungs Im not digging into them (much). You can always stop saving when necessary you can never stop paying back a loan.


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