Should we mobilize all or part of their savings to serve as a contribution or reduce their debt? This dilemma which presents itself to many debtors can only be resolved by taking into account a multitude of factors: the economic and financial context but also your personal projects, your family situation.
According to the Household Credit Observatory, the proportion of households holding loans fell slightly in 2016, reaching its lowest level since 1989. This is explained in particular by the economic slowdown following the 2008 crisis, which has largely allowed households to be cautious. However, the growth outlook could well trigger a revival in demand for credit, households are more inclined to consume.
Compare credit rates and interest rates on your savings
Should we therefore prefer credit in all circumstances? Not so sure. It all depends on the level of credit interest rates. If they are low, you may want to invest your savings. If they are high, using your savings can be a wise decision.
Take the example of real estate. An amount of € 100,000 placed on the euro fund of a life insurance contract with a net yield of 2% will allow you to have, after fifteen years, a capital of € 135,000. If the credit interest rate is less than 2%, it is better to invest this savings and pocket the difference. This is even more true in the case of the zero rate loan (PTZ), granted on means-tested conditions and which allows certain households to buy their main residence without paying interest.
If, conversely, credit interest rates are higher than those of your savings products, the money that you will borrow will cost you more than what you would earn the one that you could invest. Your interest would then rather be to save and to repay in priority your credit.
Maintain precautionary investment capacity and savings
The arguments developed so far are based on theoretical reasoning. However, we must not forget that a loan is part of a moment of life: finance the acquisition of his main residence, invest in a second home, buy a car for his daughter, equip his son’s new apartment with household appliances.
Likewise, don’t mortgage your future plans by unlocking all your savings to finance a single purchase. On the one hand, it is advisable to keep working capital to cover current expenses. On the other hand, it is preferable to keep a precautionary savings to absorb punctual and high loads (a repair on the car, roofing works, a trip abroad …). If there is no fixed rule in this area, it is generally considered that this precautionary savings must represent around three months’ salary.
An alternative in real estate: prepay your loan
If you still cannot make a decision, be aware that there are situations where it is possible to anticipate the repayment of a loan. This is particularly the case in real estate. Imagine that you had to resell your apartment or house to acquire a larger home. You then have the perfect right to repay your credit before the loan matures: this is called early repayment.
Depending on the case, your credit institution may charge you prepayment penalties, capped at 3% of the principal owed. This can have a deterrent effect, especially if you are at the start of the reimbursement. But paying off your loan early is entirely possible if you only have a few years left. Not to mention that the penalties and the period during which they apply may be part of the negotiation with your banker at the time of signing the mortgage.
There is no single answer to the question of whether it is better to save or repay your credits. It all depends on your personal situation, your plans, but also on the macroeconomic context!