Of course, we only ask this question when we have a cash flow: Do I have to repay my outstanding loans or to put the money and continue to repay? We have already published an article dealing with the same subject with real estate loans.
There is no ready-made answer that would be valid in all cases, several elements must be taken into account, you will find below answers or tracks according to these different criteria:
The main factor to consider is the rate of the current credit
You want to repay and the rate of investments you could make. To begin with, it is sufficient to put the credit rate and the rate of the proposed investment side by side. Imagine that you repay a car loan at a 2.8% interest rate and you still have 5 000 dollars to repay. You have this amount from a gift, an inheritance or others.
If you put this money on the preferred account of the French, the booklet A, this sum would bring you 0.75%, the calculation is done quickly. It is obvious that paying your auto loan early is a good idea.
If you plan to place this amount on life insurance or indexed investment a little riskier, the finding is more mixed since the average yield of life insurance turns around 2%.
The second element to consider: The borrower insurance.
- If the credit is covered by borrower insurance, repaying it will end the monthly premium deductions. This is an element that should not be neglected since it would be again to add to the interests of the credit.
- On the other hand, the fact that a credit is insured is a guarantee of reimbursement in case of a big problem (death or serious disability).
If the credit to repay is of the renewable type, do not hesitate!
Renewable credits have very high-interest rates, if you have one, check the rate: You may be surprised! In this case, no hesitation, pay this credit, you will perform an excellent operation.
Special case: zero rate credit.
Do not touch it, continue to repay the deadlines as planned.
Other things to consider:
Beware of compulsory deductions (taxation of investment income)! Booklet A, Youth Booklet, LDDS, and LEP are not affected. But some investments are subject to deductions (PFU or PFL). Inquire as these the percentage of these levies must be taken into account for the comparison.
If you want to encrypt exactly the operation:
- Referring to your loan schedule, you will know the amount of interest still due, if any, add the amount of insurance premiums to be paid until the end.
- Make or have a simulation of the proposed investment for a period equal to the remaining term of the loan. (Not forgetting any compulsory deductions).
- Compare these two amounts and you will have the answer to your dilemma.