Borrow From Yourself
There is an increasing trend these days for people to pay for things like house insurance, car insurance, maintenance contracts etc. etc. using a twelve monthly payments system to spread the cost of household and other bills. I think, in fact, that this has pretty much become the default option for many people, it is certainly convenient and can take the sting out of household bills.
The problem with these arrangements is that they are essentially credit agreements and as we all know they almost always end up costing a lot more than a one off payment with the difference between the one off payment and the 12x monthly payment going as profit to the credit provider. We may not like this arrangement but that doesn’t stop us using it.
In these days of low interest rates for savers, taking out a credit agreement to pay for these things does not make sense if you can afford to pay the cost up front though I do of course accept that this may not be an option for a lot of people. However, it may be an option for more people than may think this to be the case if you borrow from yourself instead of borrowing from a credit company.
In order to do this you need to have available at least some savings but these savings need be quite modest, just enough to cover the cost of the initial payment. Remember, this IS worth it, depending on your car insurance premium and credit history for example, choosing to pay monthly can add up to an extra 20% on the cost of your insurance over the year.
In today’s climate let’s say you have managed to put away £1000 and that you have this in a typical savings account, this might pay 3% interest over a year, £30. If you can reduce the costs of your various policies by more than £30 by paying up front from your £1000 you are always better off.
A far better thing to do when your bill comes in, if you do have a little bit saved up, is to borrow from yourself. Once you have found the best deal for your insurance or whatever, pay it up front from your savings and completely avoid credit charges, arrangement fees etc. This might feel like a difficult thing to do but financially it is a far better approach.
What you then do is divide the cost of the insurance you have paid up front into 12 equal instalments and transfer that monthly sum by standing order into your savings account from your current account. So, at the end of the year you have paid 12 instalments from your current account and your savings account is replenished but you have not paid any credit charges.
This way you are borrowing from yourself and still paying off the premium monthly from your current account but not paying credit company charges etc. This approach can save hundreds of pounds if you are able to apply it to a number of payments which you might have in the past paid by monthly instalments using a credit agreement. It really does pay to use your own savings, however modest, to avoid credit agreements, you just pay yourself back instead of a credit provider.
