Low savings rates make debt overpayment more appealing

With banks’ and building societies’ instant access accounts paying an average interest rate of 0.81%, borrowers have more reason than ever to use ‘spare’ cash to overpay debt, rather than save.

This 0.81% rate represents a five-year low, the BBC points out, while even the return on cash ISAs (Individual Savings Accounts) has fallen to 3.02%.

“Borrowers often wonder what to do with ‘spare’ money,” said a debt management expert for Gregory Pennington. “Basically, someone with some surplus funds could earn interest by putting them in a savings account, or reduce their overall interest payments by using them to overpay one of their debts, such as a credit card, overdraft or mortgage (if the terms allow this).

“In terms of interest rates alone, it usually makes sense to pay off more of the debt, as debts tend to come with higher interest rates than savings accounts – particularly at a time like this, when savings rates are so low.

“However, this isn’t necessarily the only factor – some people may have resolved to build up a certain amount in savings before they focus on overpaying debts, for example, while others may be determined to clear as much of their mortgage debt as possible as early on as possible.

“The calculations aren’t always straightforward, and we’d always advise people to seek debt advice before they decide what to do with any funds they may have at their disposal.”

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