Pay off which debt first?

rustie · 26 June 2004 at 2:06PM

Hi guys - some advice please...
I have an Abbey loan with approx 6,900 left to pay - paying 240 per month - interest set when loan started - 6.5% which is added to the total - so would I save by paying this off first or not? Settlement amount is not much less than outstanding amount...
Also have credit card with approx 8000 on - interest free as I managed to transfer to Egg on aniversary date...thankyou Martin!! paying 174 per month on this one.
Anyhow - I have just received some cash and want to pay off debts first but am not sure which one would be best to pay off...? Cant do both unfortunately...
Any advice would be most welcome.
Rustie

StratApproach · 26 June 2004 at 4:33PM

Hi,

Excellent to see you go thinking about spending.

I'm no expert and not able to provide professional advice (so the information is only what I would do)... considering, I had to deal with this situation. (the experts.... and there are some really good ones on this forum will be able to help more, and correct me too.)

A few factors to look at:
Need to know how long you have left at 0% on the card(presuming its not for life? - if so, what a result).

From this you could work out an amount you could pay off as a lump sum now, then leaving a balance that finishes just up to the date of going back to a higher interest.

Regarding the loan.
The penalty charge on paying off the loan early - how is it calculated? X number of months, or percentage of balance etc.

As the interest has been taken into account I think it would really come down to affordability of the repayments.ie the monthly commitment you are making on the payments. I presume that paying off early thoug, would help with a recalcuation on the settlement - unfair otherwise.

If there is not benefit in paying the loan in full, part or over the term. Its the affordability of 240 against 174 per month and how ong you want repayment to last.

A couple of questions worth at look at before you make any decisions.

Is there a penality to part paying of the loan?
Would you save any interest by paying the loan in full now as opposed to leaving it to finish the term?
Does the loan come with protection? which you would effectively loose if paid up.
---

On the face of it, if you can remain on the 0% to finish whatever balance you have on the card.... By paying of the 240pm comittment, then you could pay off a sum (albeit not all) from the Credit Card, or put the remainder in a savings account and then when you savings balance matches the credit card balance over time. Presto - all sorted. And it would also leave you with emergency money - if needed. Not that you would use it for anything other than an emergency?

Gut feeling (assuiming no loan protection) paying the loan is the best thing.

Hope this helps. Please listen to others, and at the end of the day its your decision. These comments are purely fictional and have no association to any animated characters, my certificate of insanity has been renewwed and I've just left the building (I think I've covered myself legally etc)

Here endeth my views

Cheers and best wishes

StratApproach

DiggingOut · 28 June 2004 at 4:08PM

;D
Good to have you here, StratApproach! Taking advice from an expert is good only if the expert happens to be right this time.

Everyone should consider the advice as it fits their situation.

Three things to do with the money.
A. Pay off the loan.
1. Exactly how much is your payoff amount on the loan? That is what it will cost you to pay it off now.
2. Exactly how many more payments do you have to go on it? You multiply the payment amount by the number of payments, and that is what it will cost you to pay it over time.
3. The savings to be gained is the difference between #1 and #2. That will tell you the value to you in paying off the loan now.

B. Pay off egg.
1. How sure are you that you can move it to another 0% when your current deal ends? If you can't, how much is it going to cost you in interest before you get egg paid off? That is the cost to you of your egg credit card debt.
2. Since you are paying 0% interest on egg right now, you should put the money in savings until the 0% ends. How much can you earn in interest between now and then on savings?
3. Adding #1&2 together tells you the value to you of saving your cash to pay off egg.

C. Savings. How much interest would you earn if you put all the money in savings, and took out £240 / month to make your loan payment? That is the benefit to you of just putting it in savings to offset your loan and using it to pay the loan.

There may be other factors, but that gives a basic framework for determining which course of action is best for you.

Pay off which debt first?

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