If there is an opportunity to save and build assets at the same time as making loan payments, many borrowers fall into further consideration. Would it be worthwhile to make an agreement on lower or higher installments when repaying the loan?? When servicing a loan, you should always put its repayment first and your savings second.
A reduction in monthly installments is therefore not recommended, as you unnecessarily prolong the repayment and thereby also automatically put higher costs on your agenda. Also consider that the current low interest rate makes the classic saving on time deposit accounts or a savings book unprofitable. For an optimal strategy, pay off the loan first, then save on unnecessary interest and monthly expenses.
Loan with early repayment – cost trap early repayment penalty
You want to repay a loan and become debt-free as quickly as possible? Keep in mind that the bank will charge an early repayment fee if you repay the loan early. You can save this by sticking to the agreed term and the conditions in your contract. Exceptions confirm the rule. Without early repayment penalty, you can repay construction loans that have already been running for 10 years and have been serviced by you.
Similarly, an error in the revocation instructions entitles you to repay immediately and not have to pay the bank lost interest in the form of an early repayment penalty. Even with flexible loans with variable borrowing rates, you can reduce the cost of a loan by exercising your right to terminate and repay the loan with three months' notice. The fact is that you first repay a loan before you think about asset accumulation.
So that you do not incur additional costs due to loan payments not agreed in the contract, you should check specifically in the case of a faster desired repayment, whether you can redeem your loan without early repayment penalty and repay faster. This cost trap is easy to circumvent, in which you behave in accordance with the contract and repay the loan as agreed, or with opportunities in the special termination right.
Better to repay loans first and save after the loan has been repaid
Even if you got a favorable interest rate, a loan always comes with additional costs. This means that if you want to save, you should focus primarily on repayment and use the time to develop a sensible and economically efficient savings strategy. On the time deposit account there is only marginal interest, which is usually far below the debit interest rate for your loan.
So there is no question why you should repay the loan first and then focus on building wealth. Since the achievable interest rates and yields hardly cover the cost of loans, repayment from the loan comes before savings. You can easily calculate the profitability of this sequence. To do this, compare the interest on the loan with the savings, i.e. the interest on a fixed-term deposit account or savings account. Here you will realize that you will pay back more interest for the loan, despite the low interest rate, than you will get for a savings balance in the amount of the loan installment at the bank.
Also consider that current loans are noted in the Schufa and take impact on your credit rating in case of non-payment. For this reason alone, you must first repay the loan before you think about a personal savings plan and consider how you can save with a noticeable return and build up assets, for example, to secure your old age.
Special feature real estate loan – repay the loan AND save money
That you should repay a loan first and save after repayment does not mean you should forgo saving a nest egg. When it comes to actually saving, we're not talking about the 5% of your monthly income that you should generally put away and have on hand for unforeseen expenses. There is also an exception for construction loans. Your credit and savings run in parallel, as home ownership is more likely to involve unforeseen purchases and larger expenses. It is recommended that you save in addition to the loan and determine the amount so that it is one third of the monthly repayment when repaying the loan.
Calculate these costs when signing the contract and design your monthly loan payments so that you can save despite credit and prepare for higher expenses, for example, the defect of a heater. With the real estate credit you have a completely special possibility for saving, in which you examine after expiration of a ten-year repayment whether you can reschedule on a more favorable construction financing. Because after this period you can repay the loan and do not have to pay an early repayment penalty to the lender. By repaying the loan without prepayment penalty in connection with a rescheduling to a more favorable financing, more money remains to save and thus the chance of a larger reserve for "contingencies" on and in your real estate.
Debt repayment despite and especially because of low interest rate phase in the foreground
In principle, loan payments take precedence. Even if you have decided to save and want to build up assets, the loan has priority in any case. Debt costs money and therefore it is important that you repay the debt, that is your loan and focus the goal of becoming debt free. Only then does it really make sense to look into a larger savings project and consider where you can earn returns and provide for your retirement.
Here the low interest rate comes to you to pass, since a classical savings plan is not worthwhile up-to-date and covers in its interest just once the inflation. With this knowledge, it is generally easier for you to decide to repay the loan before your savings project. Repay the loan in full and reschedule the debt if you find a more favorable offer and do not have to pay the lender an early repayment penalty. This direction is worthwhile and prevents costs that are avoidable.
In addition to loan payments – open time deposit account for personal savings plan?
In the case of manageable loans, it is certainly possible to save a certain monthly amount in parallel with repaying the loan. However, the interest rates on fixed deposit accounts are so low that this option is not worthwhile. If you want to earn returns and build wealth in addition to the loan, look for alternatives that match your risk. A savings plan should be flexible enough so that you can react at any time if necessary and invest the money in the loan, i.e. in its early repayment when the opportunity arises.