What to do? Bank of Scotland Loan Offer (Accepted)

a_quiet_man

Hi there all.

I've been mulling this over now for about 24 hours but can't seem to make a decision on what to do.
The scenario:

I currently have £8.5K on 5 credit cards and am only making minimum payments on all 5 cards. Interest charges are all between 18.9%APR and as high as 22.9%APR.
Total cost of all 5 payments each month is £285 and this is as much as i can afford. Obviously, I am not making any dent in the balances.

Over the last 14 months, I have made great efforts to sort out my credit cards. At least 3 were delinquent by 2 months and were overlimit. Since then, I have joined Credit Expert through Experian and have got all cards underlimit and have no accounts overdue.

As a Bank of Scotland customer for over 5 years, I applied for a loan with them on the basis that i received a communication stating that i had been "guaranteed a loan of £13,000" depending on credit checks. As my credit score has improved, I decided to apply for a loan of £8.5K so that i can repay my credit card balances and reduce my monthly outgoings.
To my surprise, I have been accepted for the loan with the following:

£8.5K over 48 months at 10.8%APR = Total Repayment of £10,005 (£218 per month)

They went on to state that because I had been guaranteed £13,000, that i could also take the following loan:

£13K over 60 months at 10.8%APR = Total Repayment of £16,881 (£281 per month)

I have a secure job and am currently looking towards taking out a mortgage on a flat with the next 18-24 months so I had the idea to take the extra funds (remaining £4.5K) and invest it into some kind of savings account to start building a deposit.

My questions would be:

Should I just take what i need and stick to my original plan of paying of my cards?

Take the full amount and use the additional funds as savings money?

All advice appreciated.
Thanks!

masterkay

I think at the minute with interest rates it would be hard to find a rate that would be higher than what you are taking the money out, therefore you would be losing on that.

I would take out what you need and save the difference between the higher and lower payments each month.

rsykes2000

Possibly if you can guarantee that you won't spend it then the extra money could come in useful. However as you say you've shad erious debt problems in the past, can you trust yourself not to fritter it away and end up in a poor position again (I know you're paying off things now and in a better position) ? Also, the money if put into a savings account will be earning a pittance in interest at the moment.

masterkay

One extra thought is that the interest rate is less than your credit cards so it would be good to best to use the loan to pay them off. Make sure you cut them up or cancel your cards as soon as you do.

Many people do the consolidate and spend again on cards a few times before they realise what they are doing.

So in that case it may be better to take the 13 to make sure you don't spend on cards again.

You know yourself best go with what you know you can do.

epsilondraconis

On the face of it, I would take the £8.5k loan, pay off the credit cards and then never ever run up the debt again.

If you take out the larger loan and then put the money in a savings account, you will be losing money each month because you will be paying 10.8% interest on the additional money, but will definitely get a lower interest rate from the savings account.

When you come to take out a mortgage, the lender will look at your income and debt level. The fact that you have a deposit means nothing, if that money is from a loan or other debt.

I suggest you also post on the debt free wannabee board as they will give you advice on how to reduce your monthly expenses and ensure more goes to your debt repayment.

P.S. If you think that when you take out this loan, that you are likely to spend on the credit cards, then I suggest you either cut up the cards or give them to a close family member that you can trust. If you need them, you can then ask your family member for them. Don't run the risk of running up the debt again after consolidating your debt.

BenL

I wouldn't take the extra if I were you, you are paying 11% interest and you will get no where near that in a savings account. The average these days is about 0.5% or something but you can get near 4%.

In a lot of cases when people take more than required it just gets wasted away on needless stuff as it is sloshing around in view.

Do you have a repayment strategy and estimation for how long the cards would have taken you to pay off?

The advantage with cards over loans in the ability to easily pay more to the debt if you have a good month or come into a little bit of money.

a_quiet_man

Ben,

Thanks for the advice and further questions.

I receive a bonus annually based on overall company performance at employer, but this is variable and so i wouldn't like to rely on it in any way. To be honest, the only strategy I have is to imply start making larger dents in the overall total balance and repay faster. I can't see this being possible retaining the balances spread across 5 cards.

I have tried about 3 motnhs ago to get a 0% BT credit card and start to take things from there, but I was rejected for this and so I feel that this is my only real option at present. My outgoings have decreased a little over the last year, but I am now renting a property privately (and I was back living with my parents rent-free last year).

Markyboy1972

Just a thought ... if you are considering the £13k and can, therefore, I assume afford £281 per month - why not take the £8.5k over a shorter period, say 36 months, and pay the loan off more quickly.

This may then help you to be debt free when you apply for your mortgage - assuming you can wait another 12 months from your current anticipated timescale of between 18-24 months - completely debt free at time of application sounds great to me!

Not sure what the monthly payment would be over 36 months, but it might be worth thinking about?

Hope this helps...

BlueAngelCV

Markyboy1972 wrote: »

Just a thought ... if you are considering the £13k and can, therefore, I assume afford £281 per month - why not take the £8.5k over a shorter period, say 36 months, and pay the loan off more quickly.

That sounds like the best idea to me. But only if you know you can pay that much money each month. If you can't do this I would take the loan they've offered and then any month you do have some spare cash put it in a savings acount. That way maybe you can may off a lump sum at the end to get rid of it early.

I definitely wouldn't take out the extra money. It would be so easy to start spending it and then before you know it it'll half gone!

naijapower

Based on your story, i would say dont take the extra. Just take exactly what you need else you would end up running more debt

a_quiet_man

Thanks folks. Grateful for the advice offered by you. I have decided to take £9000. £8.5K to pay the cards off (and cut them up, close the accounts) and £500 to buy a bike for getting to work (and increase my overall fitness).
Both financially and physically more healthy by the end of the year!