It pays to get the saving habit
Putting money aside regularly, even when you take out a loan helps to develop a saving habit with long-term benefits, says Chris Kay.
As a credit union, one of our central aims is to promote financial responsibility, so it’s fantastic to see research by the Fairbanking Foundation found that 67 per cent of credit union Save as You Borrow users who had no savings, planned to save regularly throughout the year.
In many ways it seems odd to save while borrowing. Any glance at interest rate tables will tell you that the rate at which you borrow is far higher than that for savings. It would therefore make sense to pay off the debt rather than create a separate savings pot.
However, save as you borrow is all about establishing good habits.
At some point almost all of us need to borrow, but if you have a regular saving scheme in place, it can help to repair your credit rating to ensure you get a better borrowing rate.
Having a saving plan means you are at a lower risk of missing out on repayments because you have a proven track record of financial stability and responsibility.
It also means that the buffer is there, so you may not even need to borrow when the unforeseen happens.
For example, imagine you earned £320 a week and after paying off all your utilities and essentials you find yourself left with £95.
By taking £16 out of your income (five per cent) and putting this into an account every week, you would save £832 in a year.
There is, of course, another way to save when taking out a loan and that’s by shopping around for the best interest rate.
It’s very important to look at the interest rate, term of the loan (how many months or years) and total amount repaid to be sure you are getting the best deal.
For example, if you borrowed £1,000 from Provident and paid it back with an APR of 299.3 per cent you actually pay £1,872.00 over a year.
The same loan with Cambrian Credit Union over the same 12-month term at an APR of 42.6% would come to a total repayment of £1,202.59.
The weekly repayment for the Provident loan would be £36, but for Cambrian it would be £23.13.With loans from £50 to £15,000 and rates from as little as 5.9% APR up to 42.6% APR all with free life cover, it always pays to shop around.
* Chris Kay is CEO at Cambrian Credit Union, which is a community based, financial services cooperative. He has worked in the consumer lending sector for more than 35 40 years.