Save While You Borrow
Savings while you borrow is a powerful way to ensure that you do not become over-indebted and increase your spending power. What this means is that when you take out a loan and make a loan repayment, you also pay a percentage of the loan repayment into your savings account.
For example, lets say you have taken out a loan of £1,200 repayable over 12 months (with a 10% interest rate). Your loan repayment will be around £110 per month (i.e. £100 for the loan repayment and £10 for the interest applied to the loan).
However, if you also save while you borrow, you can pay £120 per month. This will mean that you have £100 for the loan repayment, £10 for the interest on the loan and £10 deposited into your savings. The effect will mean instead of having £0 after you have repaid your loan (meaning you start right back from where you started), you have £120 in you savings account.
The idea is that instead of borrowers ending up without any money after they have repaid the loan (therefore exposing them to the possibility of further borrowing) they are able to have built up some savings. These savings can then become part of your spending budget, used for a rainy day, or can be used against another loan (typically meaning less interest rates on further borrowing). Overall what this allows consumers to do is to build up their savings unconsciously with numerous advantages of having something left over (26% of workers in the UK have £0 savings).
How To Save While Borrowing
There are two ways to save while you borrow:
- Manually
- Automatically via an ethical financial service provider.
Manually
It is not hard to save manually when you have taken out a loan. Simply look at how much your monthly loan repayment is, set up a savings account and make your choice of monthly payments into your savings account at the same time as when your monthly loan repayment can is due.
The advantage of this method is that you can set yourself your savings percentage. I recommend that you save at least the same amount as the interest paid on your loan.
The disadvantage to setting up your own saving while you borrow process is down to simply what many of us do too often – use the money that would otherwise go to the savings. This means you will not have any money left once you have repaid your loan.
Automatically
Only places where you can borrow and save will be able to do this at the same time. Credit unions (UK) are the best example of where when you take a loan out that they also put money into your savings account with them. (Find out what credit unions are by clicking here – if you are from the US or Ireland, you most likely know what a credit union is already).
Credit unions typically offer loan products where part of their condition to repay the loan is to pay a percentage into your savings account. Why do they offer this? Firstly because credit unions are not for profit mutuals – meaning their members (i.e. customers) are the only shareholders and the credit union operates for them. As such, offering the save as your borrow scheme on their loans helps them to be the social finance providers that they are, as well as being able to use the savings as additional capital to lend to other members.
Conclusion
I would recommend that you join your local credit union (the rates on loans tend to be far better than high street lenders as well as being more accessible to those who may not have the best credit).
I believe that saving while you borrow is a must for anyone who takes out a loan. It provides future safety nets as well as ensuring that you do not spiral into the a cycle of debt, which can impact everything from your general wellbeing to your job.
Crownsavers Credit Union provides financial service to those working in the South East of London. For over 21 years they have helped thousands of workers by providing ethical loans where they save as they borrow.
If you work, volunteer or you are self-employed in South East London then join them today:
http://crownsavers.co.uk/