Should you use your savings or make a loan?
In a low interest rate environment, it is sometimes wise and more profitable to make a loan instead of using your savings.
Buying a car or real estate is a very heavy burden on finances. If you have a large inheritance or savings over several years, the temptation is great to use this money for your purchase. But even if this choice seems a priori natural, it is sometimes very wise, in this context of low rates, to use a credit consumption / real estate to finance a project.
To do this, what you need to consider is your current level of indebtedness, the cost of borrowing, and the nature of the loan to be made in relation to the returns on potential investments.
Why investment returns are important in the choice?
Currently, rates in real estate, auto loan and other medium-long term loans are cheap and range from 2.45% to 3.30% over 15 to 25 years. While the return on safe investments, such as Livret A, has dropped significantly, there are still other investments such as unregistered booklets or life insurance with rates well in excess of borrowing rates. This means that life insurance products with rates around 3.5% earn more than the cost of a loan. It becomes more interesting to put a maximum of savings on a life insurance while financing a project by loan.
If you have savings and want to do some work in your home for example, you have two options:
Option 1, use your savings to finance the work
In this case, you save on the cost of credit that you must repay, but your savings are consumed which puts you at risk in the event of unforeseen circumstances.
Option 2, lend and invest all or part of the savings
If you decide to put everything in insurance, over the same period, you benefit from the difference in interest rates between the investment and the loan. Moreover, if you deposit a contribution to the contracted loan, you benefit from reductions on monthly payments.
The benefits of a loan on the use of savings
When you have saved for a long time to buy a vehicle, when the time comes, your money is there, available on your savings account for use. But once spent, you no longer have this useful safety mattress when needed. On the other hand, by saving the savings to take a loan, one can:
- depending on contributions, repay lower monthly payments
- secure your budget in the event of a bad financial pass (sickness, unemployment, temporary work …) by using the interests of money placed to reduce monthly payments
- Have excellent financial management with the guarantee of a fixed rate over the entire credit term, which generates financial margins for other projects
- benefit from favorable taxation and form a pension capital for the future, while repaying the credit.
The pitfalls to avoid by taking the option of making a loan
You must avoid accumulating several credits. Bear in mind that the loans involved in these benefits between the savings and credit rates, are of high amounts. It is important to evaluate your repayment capacity before you start, because these will determine the borrowing rate that will be applied to you even if your savings give you a lot of credibility with the lender.
The choice of the type of loan is important. Between a personal loan and an assigned loan. Which points of interest more or less can provide you with important gains over 10, 20 or 30 years.
Between using your savings or making a loan, you have the choice. Once consumed, savings can be complicated to redo. Credit allows you to keep your savings while having the opportunity to make it profitable.