What sized loan should I get?

Eoin_McLove

Hi,

In late August, I begin training as a chartered accountant, and I'm moving to Tunbridge Wells with my girlfriend, where we'll be renting an unfurnished house. When I finish university in August, I will be taking out a loan of £8,000 (probably from Northern Rock at typical 5.7%) to pay off my (ridiculously expensive, 12.9%) Barclays Career Development Loan, which I used to fund my Masters degree this year. However, I've been thinking about borrowing more than just the £8,000 to pay off my existing Career Development Loan. I've been at university for the last four years, and by the time I start my career as a chartered accountant in late August, I will have hardly any money at all, which is slightly problematic because I will need to buy a sofa, bed, furniture etc. for the unfurnished house my girlfriend and I will be renting in Tunbridge Wells. I've been doing the maths to work out how much I should borrow, but I'm not sure what to do, so your advice is greatly appreciated.

Basically, my net income will be £12,191.88 (this is my starting salary for the year, gross £15,500), which, after rent, food, £8,000 loan repayment (£87.23 per month at 5.7% over 10 years) and all other foreseen expenditure is deducted, leaves me with £39.33 per week to do what I want with. I can just about manage on this at the moment, but what with starting a new job, I think I'll be spending a lot more a week on booze, nights out, meals out, etc.

So, if I were to borrow £10,000 rather than just the £8,000 to pay off my existing loan, this would give me an extra £2,000 for the year, and with the slightly higher loan repayment (£109.04 per month), leave me with £72.76 to do what I want with per week (or 'leisure money', as I call it!). However, I think there's a good chance that I might spend up to £1,000 within the first month of living in Tunbridge Wells on furniture, etc. for my new house.

So... £12,000 loan (£8,000 of which pays off existing loan; £4,000 added to this year's income) would give me £106.19 'leisure money' per week.

The best idea I've come up with so far is to take out a £14,000 loan, leaving me with £6,000 after I've paid off the existing £8,000 Career Development Loan. If I were to allocate £3,000 to my first year (Aug. 2006 - Aug. 2007) and £3,000 to my second year (Sept. 2007 - Sept. 2008), I would have £81.92 per week leisure money in the first year, and £104.23 in the second year.

Even though I know I can afford the repayments for a £14,000 loan (£152.66 per month for 10 years), I still feel as though it might be an unwise move, and I'm not sure if I want to be burdened with a loan of this size. Even so, the extra £6,000 really would help me out and enable me to enjoy my first couple of years training as an accountant, without worrying about having enough money to go out and have fun! If I only took out the standard £8,000 loan, I'd have £39.33 leisure money per week for my first year, and £61.63 for the second. It's not to be sniffed at, of course, but I do think I'll be spending a lot more, and I don't want to be constantly worrying about my money situation when I've got to do my accountancy exams etc.

So, do I take out a bigger loan to help me to be money-worry-free in the short term, giving me a larger income to get me started, or do I just take out the necessary £8,000 to pay off my existing loan, and get by on my salary? Bearing in mind that I ought to be earning £30,000 after three years when I qualify as an accountant, I could pay the loan off early without too much hassle.

Apologies for the lengthy post and (probably) unnecessary detail.

bikerqueen

you'll be paying it off over 10 years. You're now what, 24? do youreally still want to be paying for your living expenses when you were 24/25 when you're 34?

Don't buy new furniture, that'll save a mint. Go to DFW board, they'll help you cut down expenses so there's more money for going out, as that is your priority. I did what you want to do, now I'm 26, married, mortgaged and pregnant, and still paying for ridiculous things I bought when I was 21 and just left uni.

bikerqueen

you'll be paying it off over 10 years. You're now what, 24? do youreally still want to be paying for your living expenses when you were 24/25 when you're 34?

Don't buy new furniture, that'll save a mint. Go to DFW board, they'll help you cut down expenses so there's more money for going out, as that is your priority. I did what you want to do, now I'm 26, married, mortgaged and pregnant, and still paying for ridiculous things I bought when I was 21 and just left uni.

Debt_Free_Chick

Plenty of money in Tunbridge Wells and surrounding area. So look out for "garage sales" and the small ads where you can pick up good quality furniture for next to nothing. Almost certainly better than what you can afford to buy, brand new.

Borrowing to fund leisure activities is a really bad idea. You're renting a house .... no opportunity for another tenant to share the cost with? No opportunity to rent a cheaper place e.g. a flat (although all the new apartments in TW are going for an absolute mint!).

How about renting somewhere slightly cheaper and commuting to TW? Tonbridge would be the ideal choice - only about 10 mins on the train.

Don't start off by having a lifestyle you can't afford - you need to live within your means. Otherwise, you'll end up in serious debt and that could be disastrous for your chosen career.

Look at trimming your outgoings - especially your rent.

Robert_Sterling

Perhaps no loan at all might be the best solution.

Eoin_McLove

Thanks for the advice everyone.

I still don't think there is anything wrong with using a loan to give me a bit of extra income in the next two years. I just look at it from the view that I'll be earning well over £30k after three years (provided that I pass my exams!), and hopefully £50k within five or six years, so I will certainly have the means to pay off the loan, and probably well before the ten years are up. If my financial prospects were pretty mediocre, then of course I wouldn't even think of taking out a larger loan. But why not borrow £14,000, pay off my £8,000 Career Development Loan, leave myself with £6,000 to better my standard of living for a couple of years, and then pay it off comfortably when the money starts rolling in?

I do appreciate the tips though.

grumbler

Eoin_McLove wrote:

... using a loan to give me a bit of extra income ...

I cannot believe that an accountant can say this. A loan cannot give extra income. It can only add extra expences: interest and fees.

lynzpower

I agree with other posters.

Have alook what you can get 2nd hand as others have suggested or if you must go for 0% finance like a 0% CC or a 0% from sofa companies/ catalogues etc and pay off asap

Presumably your girlfreind will be paying half of these costs too?

INcidentally why will you be going for an unfurnished place? Most places come furnished in my experience, so why not just choose one of those instead?

morg_monster

I do think this is a bad idea.

Why not get a 0% CC like Lynz says? Then you can buy what you need and pay it back over the course of the 0%. Also I realise that you are on course to have a good salary - but what if it takes a little longer to get there than you expect? Or what if after a couple of years you decide you don't want this career? Anything could come up.

Why not match your lifestyle to your salary. As others have said, get a flat somewhere cheaper, make sure its furnished, then as your salary increases, get a new place and buy your own furniture, move closer to TW, etcetera. Don't live beyond your means, that really is a recipe for trouble.

Have a visit to the debt-free board. There are plenty of people there with excellent salaries who still struggle because of old debts, and also plenty of people from professions like accountancy where you might guess that they would be 'better with money' than the average. Also if they saw this thread (like lynz did) they would probably tell you tales to make your hair curl and vow never to go into the red. The fact is, the vast majority of people start as you are, making sure they can afford repayments before taking out credit. But, life gets in the way, and before you know it you're struggling. Don't assume that you are too sensible to get into trouble.

Are you saving any money at the moment? I don't think you mention it. Again, going out 'into the big wide world' you should start trying to save money for a rainy day, even if it is only a small amount.

I really think you should think about this a lot more, it seems to me that you want the easy life (money now, worry later) rather than thinking about cutting back on things and having a lifestyle you can afford. This will get you in serious poopoo in the future.

Why not be sensible now and in a few years you'll have more of your salary to spend on yourselves, without having to chuck a load of it at loan repayments. On the Debt free board they will have lots of ideas to cut down your monthly expenses so that you'll have more 'leisure money' as you call it, without borrowing more.

Edited: I have just reread this and think it sounds a bit patronising to you Eoin. I do apologise, please don't take offence, but I still stand by my points!

Eoin_McLove

Thanks again for the advice. I completely acknowledge that taking out a loan is not to be done willy-nilly. Hence why I am on here!

Nearly all the properties available for rent in Tunbridge Wells are unfurnished; furnished properties are very much few and far between in TW, and tend to be slightly more expensive. Incidentally, I don't plan to buy any furniture brand new; that really would be silly. I plan to use the Free Ads, or better still, Freecycle. Tonbridge isn't much cheaper for rent than Tunbridge Wells (£50 pcm less on average, and I'll have to fork out £2.50 per day on the train to work for twenty days each month!), and I'd rather live close to where I work, where my new friends will be, etc.

0% credit cards wouldn't give me the kind of extra money I need in the short-term. I have an Egg Card at the moment with a £1,250 credit-limit, but that's going to be used for transferring my overdraft to when I have to decrease my overdraft limit to from -£2,000 to -£1,000 in August.

No, morg_monster, I am not saving any money at the moment, simply because I can't. Working in Sainsbury's twelve hours a week whilst studying for a postgraduate degree isn't conducive to money-saving. But once I start work in August, money will be saved. No, you haven't come across as patronising; I really appreciate your advice. I'm not dead-set on taking out more than £8,000 (as I said, I have to take out £8,000 to pay off my Career Development Loan, which I used to fund my Masters degree), but I am open to the possibility of taking out anything up to £14,000, just to give me a boost in the short-term. I could manage on my salary alone, but I don't want to feel like I'm constantly worrying about my finances (£39 'leisure money' per week for a Tunbridge Wells yuppie is cutting it fine), as I have been for the past couple of years. As I said, it seems reasonable to me to increase my income in the short-term by taking out up to £14,000, and then once qualified as an accountant, to repay this quickly without really noticing it too much (£14k loan over initial 10-year repayment term is c.£150 per month - once qualified, I'll be on c.£2,000 net per month).

I will think about it very carefully though, of course.

lynzpower

it sounds like you have already made your mind up to me

I would take out the very bare minimum to carry over your CDL.
Then use other finances as you NEED to like 0% cards or low LOB cards.

I certainly would not get a loan, especially over such a massive term!!!!

I am a debt free wannabee, and I am doing OK. But I have a much bigger salary than you will be looking at for a few years yet. It is not easy, and I am living practically on the breadline to manage my payments and to pay it off as quickly as possible.