Pay off debts right away or save to pay them off????

stant1man

Hi all,

I'm new to the forum and both myself and my wife have decided to clear our feet since getting married in June.

We have a total debt of £18000 over 5 different lenders and we are currently paying £490pm to clear it with different loans finishing at different times.

I know the golden rule is not to save until you have paid off your debts but i'm struggling to understand why this is the right way to go about things.

I intend to increase my payments by a total of £250pm meaning I will be out of pocket a total of £740pm.

I was thinking that if I put the £250 into a savings account every month until I meet the settlement figure then I would accrue interest on it as opposed to just putting it into the loan where I will accrue nothing... or am I missing something?

Sorry if this seems silly but it really confuses me...

racer256

I would pay them off as you get spare cash, otherwise you would be tempted to spend the money and also your interest rates on your debt is higher than that on your savings.

oopalah

Hi stant1man, and welcome to the forum.
If the interest rate on your loans is less than the interest rate on your savings, then by all means, save. But if its the other way round, then it makes sense to pay off your loans before you start saving.
Best of luck.

whatatwit

Is the interest pre-loaded, in that whether you pay it off now or pay as it goes, then you will pay the same amount?

If it is, then it's down to sheer will power...if you can 100% say that you will not touch that money, no matter what, then yes save it.
If it was me, I'd be trying to get rid of the loans, otherwise the money would be frittered away.

SGB2604

I am in a similar frame of mind to stant1man(sorry to butt in!), so cant see where he is coming from. But I also want to know if it is more worthwhile saving for several months and paying a big sum as he has just suggested, or pay an additional amount on a monthly basis? I have posted this query elsewhere to apologies if someone is reading this again!
I am with LLoyds for my loan, if this helps, and also the bank were on board with me paying a bigger sum every few months. I havent asked about the monthly thing. Also does anyone think there would be any penalties for trying to pay more monthly?
Thanks in advance!

SGB2604

Sorry, have just seen those 2 other posts which must have appeared while I was writing my other post! But I would still like to know whether the monthly or longer term thing is best-would I just end up treading water, or would people need more info about my rates to judge properly?

RAS

Hi

It depends and you nee to read the terms and conditions of your loans.

If the interest is front loaded and there is not option to overpay, then paying off early will not be advantageous.

If there is an early redemption penalty, you need help to work out the best action.

If you can over pay and this reduce your future payments, then do so. But ensure you know what the rules are for overpayment. For instance, if you can make one additional payment per year, you need to save up and pay annually, not pay monthly.

stant1man

oopalah wrote: »

Hi stant1man, and welcome to the forum.
If the interest rate on your loans is less than the interest rate on your savings, then by all means, save. But if its the other way round, then it makes sense to pay off your loans before you start saving.
Best of luck.

Thanks for the replys folks, so are you saying that me paying off my highest interest loans first will see me essentially not get charged 8% on the amount that I have paid in as opposed to me paying it into a savings account getting 5%.... So confusing for me....

MyLastFiver

stant1man wrote: »

I was thinking that if I put the £250 into a savings account every month until I meet the settlement figure then I would accrue interest on it as opposed to just putting it into the loan where I will accrue nothing... or am I missing something?

Yes you're missing something. You pay interest on those loans, undoubtedly more interest than you would earn by putting a comparable capital sum into a savings account.

If you have spare money, then paying off the loans early is most likely to make you the most money. Unless, as others have said, you pay the full whack of interest on the loans whether you pay back early or not. Although I can't see this is likely. You need to ask your creditors about your early repayment options.

SGB2604

Thanks RAS, Ill dig out my T&Cs shortly.
Love your little quote BTW. Very true!

RAS

MyLastFiver wrote: »

Unless, as others have said, you pay the full whack of interest on the loans whether you pay back early or not. Although I can't see this is likely.

Unfortunately very common, particularly with finance loans associated with purchases and cars and with managed loans from banks