Should You Pay Off Your 11% Interest Loan During the Pandemic with Your Savings?

During these challenging times, the decision to repay a high-interest loan or continue to hold onto your savings can be contentious. With interest rates as high as 11%, the question is whether it is wise to pay it off or to let it hang while you focus on your financial stability.

Understanding the Financial Impact

When your savings earn a lower interest rate than the loan's interest rate, it makes sense to use your savings to pay off the loan. A 11% interest rate can drain your savings, causing a significant strain on your financial resources. However, consider the liquidity and flexibility your savings provide. Being liquid means having access to funds, which can be crucial in times of emergency or opportunity.

There are other options to reduce your interest burden. If you can secure a personal bank loan at a much lower interest rate, consider refinancing. Banks might require collateral to approve the loan, such as a vehicle or your real estate. This can be a viable strategy to lower your debt burden if your savings are not sufficient to pay off the loan in full.

Factors to Consider Before Repaying the Loan

The decision to repay your 11% interest loan is not straightforward and depends on several factors:

Loan Type and Term: If it is a short-term loan that you can pay off soon, it might be beneficial to do so. However, if you need to stretch the repayment over a longer period, consider your job security and financial stability. A stable emergency fund can provide a buffer in uncertain times. Job Security: If you have a stable job, paying off the loan can improve your financial stability. Conversely, if you are vulnerable to job loss, it might be wise to maintain liquidity in your savings. Investment Returns: Evaluate the returns from your investments compared to the loan interest rate. If you have savings in low-interest bank accounts, it is more beneficial to pay off the loan. On the other hand, if your stocks are performing well and yielding more than 11% annually, you might want to hold them.

Evaluating Your Investment and Loan Situation

Whether to pay off your 11% loan with your savings depends on how you have invested your money and the purpose of the loan. Here are some key points to consider:

Investment Performance: Assess the performance of your investments. If you have low-value shares, you might need to sell them to clear the loan. If the returns are significantly greater than 11%, hold your shares. If the returns are less than or around 11%, consider paying off the loan. Loan Purpose: Examine the purpose of the loan. If the loan was for a car that you use to get to work and it is likely to lose value over time, consider paying off the loan. In uncertain times like the pandemic, being able to finance the loan becomes less viable.

Compounding and Financial Security

The principle of compounding works in both directions. If you have debt, you are losing the exponential growth of your savings, and you are instead paying exponential interest to the lender. On the other hand, if you are debt-free, your savings can grow exponentially, providing long-term financial security.

Financial security can be a form of delusion. Holding onto savings in low-interest bank accounts can provide a false sense of security, while being debt-free can give you true financial stability. In times of uncertainty, it is crucial to have a clear understanding of your financial situation and make informed decisions.

Conclusion

The decision to pay off your 11% interest loan with your savings during the pandemic is a matter of balancing financial stability and risk. It is essential to weigh the benefits of having liquid savings against the cost of the high-interest loan. By considering your financial situation, job security, and investment performance, you can make a well-informed decision that aligns with your long-term financial goals.