While digging, one can find sources of inspiration in Catholic documentation, the religious texts obviously not inviting one to live on credit. A version close to the saying Who loses his debts gets richer – is it attributed to Honor de Balzac, novelist of the 19th century. Whatever its origin, this proverb is still anchored in people’s minds today. It has mainly resurfaced in the editorials and chronicles following the financial crisis: for the editorialists concerned, this proverb made it possible to point out the annoying habit of states to dig their debts. Or, conversely, editorialists have taken this proverb backwards to point to the success of companies whose states have paid off debts. But should you make this proverb a rule of conduct for your personal finances?
Prepayment: why, how?
The problem posed by this proverb concerns households already and already in debt and can be translated into: is it better to repay their credits or take advantage of his money? More precisely, in other words: if you have a nest egg and you are in debt, should you make a prepayment?
Prepayment of part or all of a loan is possible for a mortgage as for a consumer loan. This obviously makes it possible to realize savings, in the short, medium or long term: by shortening the duration of repayment, and by lightening the remaining capital of, you minimize the interests of Borrowing. However, in both cases, repaying a loan in advance may be subject to penalties, the amount of which is capped. For a consumer credit, early repayment indemnities (IRAs) can be claimed only if the remaining capital exceeds $ 10,000, and these IRAs cannot be exceeded. spend 0.5% or 1% of the amount depending on the remaining credit duration. Despite these penalties, if you have several years of repayment,For a real estate loan, under current low interest rate conditions, these IRAs cannot exceed the equivalent of 6 months of interest.
Why this proverb is (partly) wrong?
Dilemma: are the savings that can be made through early repayment more important, financially speaking, than what you could gain by keeping the savings in question, in order to invest them? Many financial advisers will discourage you from rushing to repay! Because this package offers you the opportunity to make potentially more profitable investments.
The principle? Failure to repay a loan at a low rate – as is the case with current real estate loans – makes it possible to place the available sums on products to which you would not necessarily have access with lower amounts. : SCPI, rental real estate, high-end life insurance under mandate management, diversified investment in equities. A strategy that allows you to become richer in the long term.
Why this proverb is (partly) true?
In practice? At the beginning of summer, It simulated the reimbursement VS savings match under current market conditions, for real estate borrowers (credit of 200,000 dollars over 20 years signed in 2016 at 2%) with a savings of 40,000 dollars. Result: by making an early repayment, despite the penalties, they save more than 17,000 dollars in interest and loan insurance. Only an investment yielding more than 2.70% (net of all social and tax deductions) each year can be as profitable! Not easy to find today …
Find the example in detail in the article Do I still have to repay my loan in advance?
Thus, in view of the low yields on the savings market, the proverb that pays off debts gets richer makes sense. But this conclusion only applies to the current economic situation.
Financial or psychological logic?
Beyond the purely financial aspect, this proverb also refers to a psychological aspect, much more timeless: to lighten the weight of debts can avoid the pressure that accompanies it. To remove, for some, the fear of over-indebtedness. Some will therefore find this adage reassuring, and others financially aberrant. It all depends on the risks you are ready to take. To take up another commonplace, very practical to end an insoluble debate: Everyone has their own truth!