Buying an automobile or real estate is a very heavy burden on your finances. If you have a large inheritance or savings made over several years, the temptation is great to use this money for your purchase. But even though this choice seems natural a priori, it is sometimes very judicious, in this context of low interest rates, to resort to a consumer / real estate loan to finance a spending project.
To do this, what you need to consider is your current level of debt, the cost of borrowing and the nature of the loan to be made in relation to the returns on possible investments.
Why are investment returns important in choosing?
Currently, the rates charged in real estate, car loans and other medium to long term loans are cheap and vary between 2.45% and 3.30% over 15 to 25 years. Even if the yield of safe investments such as the A booklet has greatly diminished, there are still other investments such as unregulated booklets or life insurance whose rates are much higher than loan rates. This means that life insurance products whose rates are around 3.5% yield more than the cost of a loan. It becomes more interesting to put as much savings as possible on life insurance while borrowing a project.
If you have savings and want to do 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 the credit that you have to repay, but your savings are consumed which exposes you to risks in the event of unforeseen circumstances.
Option 2, lend and invest all or part of the savings
If you decide to invest everything in insurance, over the same period, you benefit from the difference in rate between the investment and the loan. In addition, if you deposit a contribution to the loan taken out, you benefit from reductions on the monthly payments.
The advantages of a loan over 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 in your savings account for use. But once spent, you no longer have that useful safety mattress when needed. On the other hand, by keeping the savings to take out a loan, we can:
- based on contributions, repay lower monthly payments
- secure your budget in the event of a bad financial situation (illness, unemployment, temporary work, etc.) by using the interest on the money placed to reduce monthly payments
- have excellent management of your finances with the guarantee of a fixed rate over the entire term of the loan, which frees up financial margins for other projects
- benefit from favorable taxation and build up pension capital for the future, while repaying the loan.
The pitfalls to avoid when taking the option of making a loan
You must avoid accumulating several credits. Keep in mind that the loans affected by these advantages between savings and credit rates are large amounts. It is important to carefully assess your repayment capacity before you start, because these elements will determine the borrowing rate that will be applied to you even if your savings give you great credibility with the lender.
The choice of the type of loan is important. Between a personal loan and an affected loan . What more or less points of interest can give you significant additional gains over 10, 20 or 30 years.
You have the choice between using your savings or making a loan. Once consumed, saving can be complicated to redo. Credit allows you to keep your savings while having the possibility of making it profitable.