In many occasions, Singaporean are caught up in the dilemma of whether to repay their debts or save. The answer to this may seem obvious to some individuals but once you take a harder look at your financial standing that might change. It is important that you take time to look through your credit reports for you to have a much clearer picture of the standing of your personal finances.
There are several people in Singapore who have both savings and debts account running concurrently. Therefore, to such individuals, they have familiarized themselves with the situation of holding debt and having money saved up in their savings account. A lot of people in Singapore hold some type of debt in their lives. The debt may be a short-term moneylender personal loan, a car loan, a study loan, or maybe a mortgage loan.
Although you may not be in a position to repay the mortgage loan considering it is a large sum of money involved, there are in fact some ways for you to pay off you study and car loan using your savings. But on most occasions, people prefer not to because of various reasons. Some of the fears people may have included being afraid that they need to have some ready cash available to them in case an emergency happens. It is for this reason that some people would rather spend money paying for interest on loans for them to have a bit of safety by having money in their savings account. Even then, there is really little logic in such an argument.
Read on for you to better be aware of some pointers that will help you resolve your dilemma on whether to save or repay your outstanding debts.
The Price Of Debts
In making use of a very easy example this will show you the amount of money you may be forfeiting when you are holding both a savings and debit account:
– $2,500 worth of credit card debt for each year will cost you about $550 in interest
– $2,500 worth of savings for each year will be earning you about $10 in interest
Therefore, whereas you are not earning a large amount by having the $2,500 in a savings account, you would be saving yourself $550 in interest when you take the $2,500 in the savings account and paying off the existing credit card debt. Thus it is easier for you to pay off your outstanding credit card debt and save the $550 instead.
This rule holds true considering the charges of debt are normally a lot higher compared to any interests you earn from saving money in your deposit account. Nevertheless, there are a few exceptions to this rule.
These exceptions include:
1. Early Payment Penalties
There are some debts, like the moneylender personal and mortgage loans which involve you in taking them for a minimum period of time. To which when you make early payments will attract a penalty.
In such occasions when you are paying off the existing debt it instead attracts a penalty, it is better for you to keep your money in a savings account. This is until you are able to clear the debt without incurring any pre-payment charges.
It is always advisable to make this clarification before signing your loan contract. This way you are aware of the additional you will be taking on in case you choose to do an early payment.
2. Interest-Free Credit
It is important for you to recognize that most debts will cost you more than the interest amount you may earn from having a savings account. Even then there are some debt types that do not fall into this category. These debt types include the interest-free debts. It’s probable you may not be aware of this, but there are several products that will offer you interest-free debt.
In essence, these products offer to loan you cash at no additional cost. The interest-free debts available in Singapore include the balance transfer cards, various student loans, and the 0% interest credit card payment plans.
For example, most student loans are in general interest-free as you are studying. And banks only start charging interests once you have graduated. One smart way for you to handle your money is by putting whatever money you may have in your savings account or even a fixed deposit. This is all through your studying period and then pay off a large amount debt as you can once you have graduated. Of importance is that you need to make payment of a debt a priority for you given that debt entails a cost.
The key here is to start by paying off the most expensive debts first. Some of the expensive debts may include moneylender personal loans and credit cards. One thing to note is that mortgage loans are a bit different because their rates of interest are somewhat lower. But since of the large amount you are taking out, it may perhaps be difficult for you to pay them off at once.
What you could do instead is to repay as much of the debt as you can following the lock- period. And also before you can refinance this debt this way you will only need to take on a much smaller debt thus greatly reducing your interest cost.
A lot of people hold some type of debt in their lives. The debt may be a short-term or even a long-term type of loan. Even then there are a few people in Singapore who keep both savings and debit account running concurrently. It is important that you recognize that the interest charges on debt are normally a lot higher compared to any interests you earn from saving money in your deposit account.
Nevertheless, there are a few debts that are an exception to this rule. These include the interest-free debts such as student loans. These debt products offer you an interest-free debt of which when you make early payments you end up incurring a penalty.
In such cases, you may consider putting your money in savings to later use once the lock period has elapsed.