Often when you have enough savings to pay for something, whether it’s something useful or more of an impulse purchase that you could have done without, you tend to think that you’re going to pay for it with the available savings. It is a choice that can be quite judicious and it will depend on the amount of the purchase in relation to the savings available.
At first glance, there’s no point in taking out a loan of any kind once you have the savings available, you might say? Useless at first glance only, because there are many reasons to take out a loan when you have the funds available. This is what we will see together, why borrow when you have the savings available?
- Deceptive appearances in the credit / savings relationship
- Multiple interests to borrow when you have the savings available
Why should appearances tell us not to?
With very few exceptions, you will never find a borrowing rate lower than the interest rate you enjoy for your savings in any form: PEL, life insurance… and if you do, it is because, as in the case of a zero-interest loan for example, you meet certain conditions that induce a loan. In other words, the lending institutions will only grant you an advantageous loan rate when the commitment rate at your level is high, much more so than in the case of a “pleasure purchase”: buying a main residence, rental investment, etc.
Therefore, why borrow at a higher rate to buy a new car or to go on a trip when you have savings available in your Level A or another investment? For several reasons, here are some of the reasons.
What are the advantages of borrowing when you have savings?
Let’s take the example of our car for example. The choice can first of all be guided by the conditions of sale and what you can benefit from. For example, you will not be able to benefit from the warranty and maintenance offered for your car by buying it with a cash payment whereas you can benefit from it by leasing it.
Of course, this will cost you more in the end, but in addition to this advantage of the guarantee and maintenance offered, you will be able to change your car regularly without the extra charge and use your available funds for other purposes (going on holiday, enjoying various leisure activities) for which you would not be able to benefit from a loan or at a much higher borrowing rate.
The other big advantage of borrowing when you have savings available is that you can keep what is known as a “pear for thirst” in case of a hard blow(s). If you don’t have a debt ratio that is close to the limit at which banks usually stop lending to you to avoid over-indebtedness (as a reminder 33%) you can more easily negotiate the terms of a loan with available savings that the bank will see as a safety valve.
And if unfortunately, a hard blow should, unfortunately, come your way, the loan will already have been granted with the correct conditions and you will have your savings at your disposal to get through this delicate passage while waiting for things to get better.
If, on the other hand, you buy what you want by financing it with your savings and then the hard blow comes later, you will have to try to get a £1000 loan as a matter of urgency and with no savings available in your account, putting you in a much more difficult position to negotiate your loan.