What sized loan should I get?

Eoin_McLove

No, I haven't made up my mind. I'm just putting forward reasons why it might be advantageous to take out the larger loan.

The only reason for taking a loan out over ten years (the maximum allowed by Northern Rock) is that it reduces my monthly payments to the lowest possible amount. There is no early repayment penalty, so once the wonga starts coming in, I can increase my repayments and pay the loan off much earlier than ten years. A ten-year term decreases my monthly repayments, thereby freeing up money for other things whilst I'm on an average salary for the next two years. Surely good money-saving?

Remember that lots of graduates take out loans, simply because they have no savings, and when they start a career they need money for all sorts of things. I have absolutely no money to start with in Tunbridge Wells, so a loan to give me a bit of a kick-start makes reasonable sense, in spite of being well-aware of the (possible) long-term burden of repayments.

My main line of argument is that it seems fair to take out a loan to give me extra income for the next couple of years whilst I'm on an average salary, knowing that (provided I pass exams, enjoy my career, etc.) I am on a path to earning £30k+ after three years, and potentially £75k within ten years, should I become a partner in my firm. Naive? Nooo...

Debt_Free_Chick

Eoin_McLove wrote:

The only reason for taking a loan out over ten years (the maximum allowed by Northern Rock) is that it reduces my monthly payments to the lowest possible amount.

And raises the interest you pay back on top of the capital to the highest possible amount

As a general rule, borrowing simply to "live" is a very, very bad idea. It is simply far better to live according to your means, even if it means making sacrifices in the early years because, as you say, you'll get pay-back in later years as your earnings increase.

Essentially, you are trying to spend today what you might earn in several years time. You'll never see the benefit of future salary increases as you will already have spent them.

Cheers

Eoin_McLove

True, it raises the overall amount of interest paid, but I'd only feel the sting of this if I repaid the loan over the whole ten-year term. Paying it off in, say, six years, which is quite possible, would avoid a good deal of this additional interest.

I completely understand what you're saying though. Borrowing to 'live better' is unwise, and living within my means is far more sensible in the long term. However, as I said, I really could do with around £1,000 to get me started when I move to Tunbridge Wells. I need second-hand furniture (well, just a bed, sofa, and maybe a wardrobe and chest of drawers, as I've accumulated quite a few bits and pieces since I've been at uni!), a new PC (my laptop's on the blink - literally, the screen flashes on and off thirty-odd times a day), new suits, shirts, shoes, etc. I suppose the easy answer would be to take a £9,000 loan: £8,000 for the CDL, and £1,000 to get me started in Tunbridge Wells.

But just look at the maths:

- Year 1 net salary: £12,190 - without extra loan, 'leisure money' is £39.33 p/w
- Year 2 net salary: c. £13,550 - without extra loan, leisure money = £61.63 p/w
- Year 3 net salary: c. £16,500 - without extra loan, leisure money = £83.15 p/w
- Year 4 net salary (now qualified as accountant): c. £22,500 - without extra loan, leisure money = £173.18 p/w

Now if I take out £14,000, leaving me £6,000 after the CDL is paid off, and then allocate £3,000 to Year 1 and £3,000 to Year 2, I get the following:

- Year 1 net income (loan + salary): £15,190 - leisure money = £81.92 p/w
- Year 2: c. £16,550 - leisure money = £104.23 p/w
- Year 3 net salary (loan 'used up'): c. £16,500 - leisure money = £71.26 p/w
- Year 4 net salary: c. £22,500 - leisure money = £158.08

So, taking out the £14,000 loan gives me much more money for the first two years (not necessarily for going out on the razz, but for unforeseen expenditure, etc. - basically it's money that's 'mine', money that's left over after loan repayments, rent, petrol, food, etc), and also doesn't have too much effect for the subsequent years. Without taking a larger loan, I have £173.18 p/w in my fourth year; with the £14,000 loan, this is reduced to £158.08 p/w, since of course I have the larger loan repayments. I think that perhaps it is a fairly good 'investment', in that I'll be much, much better off in my first and second years, just for the sacrifice of around £15 per week in my fourth year (and around £12 in my third year too).

As I said, I'd take out the loan to give me a boost in the short-term, and as you can see, the long-term financial effects of the loan aren't particularly damaging. In third year: £83.15 p/w without loan, cf. £71.26 p/w with loan. In fourth year: £173.18 p/w without loan, cf. £158.08 with loan.

Apologies for length (of the post).

morg_monster

What would your calculations above look like with just a £8000 loan? Just interested, I suppose you would have a bit more per week due to less interest.

Ultimately I agree that £40 a week isn't much to live on even if you just wanted to go out once a week. And I know it isn't much fun to have little cash to play with. But hold on a minute.

Llooking at it from the other direction, ignoring the loan,
12190/52-39.33=£195.09 a week that you are spending on 'the essentials'. This seems a lot! Especially if your girlfriend is also working and you're splitting the bills, if this is the case it seems to me you are wasting a lot of cash between the two of you. Are you sure you can't get this down? Because I would first be thinking 'Why am I spending so much on essentials'. If you don't mind me asking what do you include in this 'essentials'? Are you one of these people with a £60 a month mobile bill, and buying lunch every day at work? Again I appreciate you might not be doing this at the moment as a student - but are you overestimating your future expenditure?

If you've seen the Debt free board, this list of monthly outgoings and incomings is referred to as a Statement of affairs or SOA. Even if you don't want to be bothered posting a detailed one, it might be helpful for yourself to look at it in more detail at some point. It just seems to me that you are spending a lot.

(now you are going to make me feel really guilty and tell me that your girlfriend volunteers with sick children and fluffy bunnies so you have to shoulder all the financial burdens!! ;-))

Gorgeous_George

Sounds great if all your assumptions work out.

Try reviewing the outcome if the assumptions fail to materialise. What if:
you fail some of the exams
job doesn't materialise
girlfriend gets pregnant
girlfriend moves out
rent increases
car needs maintenance

Ok, you're the accountant, you do the maths. If having considered the risks and looked at the costs of the loan, you think it's a good idea, go for it. Having the loan hanging over your head might help you focus on passing the exams.

Did you mention gf's income anywhere? Is she paying half of the rent etc.?

Finally, get two loans - one each. That way, if she runs, she can take her share of the debt with her.



GG

Eoin_McLove

:rotfl: George. You just have to go and spoil my plans don't you! Not much chance of my girlfriend getting pregnant if trends continue... :rolleyes:

morg_monster: those first calculations take into account the £8,000 loan. With just the £8,000 loan, which disappears immediately because it pays off my CDL, I am left with £39.33 p/w in first year, £61.63 in second year, and so on, as I listed. The second set of calculations was based on a £14,000 loan.

When you put it like that, £195 per week (edit*) is rather a bloody lot, morg_monster! I don't have a weekly expenditure forecast for next year, only an annual one, but this should give you an idea: (N.B. my girlfriend and I pay half each on things we share, e.g. rent, bills, etc., but the following is just what I will spend - also, the budget is based on what I've spent this year [I've been keeping an 'expenditure spreadsheet' since I started my MA last September], plus a bit more where applicable, so it is 'scientific', not just airy-fairy forecasting )

- Rent: £4,200 (based on £350 pcm: maximum I will pay)
- Food: £1,820 (£35 per week [from Sept. 05 to present, I average £34.27 per week on food] - I don't compromise on my grub though!)
- Petrol: £500
- Birthdays/Xmas, etc.: £600
- Council Tax: £600
- Mobile Phone: £240.00
- NTL digital and broadband: £243.00
- Electricity and Gas: £300.00
- Water: £150.00
- Inhalers (asthma): £117.00
- Haircut: £120.00
- TV License: £65.00
- CDL Repayments (based on just £8,000 loan): £1,046.76
- Student Loan: £45.00
- House Insurance: £100.00
TOTAL: £10,146.76

My net salary is £12,190. This leaves me £2,044 'leisure money', or £39.33 per week.

With a £14,000 loan, my annual loan repayments increase to £1,831.92, as opposed to the £1,046.76 with an £8,000 loan.

Thank you for taking an interest. :T

Basil_Hume

I really, really urge a re-think here. I sense that you are on the cusp of jumping into something you may later regret. I don't think the amount of debt you are considering is outstandingly large, but your expected income, lifestyle, potential for moneysaving and term of the loan all stand out.

I used to work at the Citizens Advice Bureau as a student and take it from me (if not the myriad of other posters) - *debt sucks*. Not only do you not enjoy the extra money you had when you took on the debt, but you also have to pay it back (a kind of £120 to £80 analogy on an original of £100).

I think some broad assumptions have been made here in looking ahead up to a decade in the future. I too was once studying to become an accountant. I was lucky since I had a better career offer come my way - and I'm a lot happier (and better paid) than my former colleagues as a result of this good fortune. Other accountancy chums of mine were not so fortunate. Many others sadly left accountancy without completion due to failing exams; I'd say 50% of my course mates did not complete.

My message here is to look very critically at potential career paths - especially ones with exams - since they are rarely predictable. I think you're taking a big gamble in looking at your prospects over ten years and connecting them so inextricably to your finances.

Looking at your potential income, if I might be so candid: even as a year 1 accountant in south Wales I was earning 40% more than your starting salary - as were most other accountants I knew. Add the general cost of living in the south of England and I wonder whether there might be some better paid options? Many of the big accountancy firms will be open for graduate recruitment right now, which is how many of my former contemporaries found their trainee accountant jobs.

I would also urge a re-think about your outgoings. I detect that you have a car; is this really necessary when you're planning to live close to work? Plus the insurance, tax and repair costs? I also think you can get prescriptions cheaper (get a pre-paid annual certificate? is this cheaper?) and NTL TV is probably a luxury given the income above IMO!

I would also urge you had a very firm view on current and future expenditure. I made a pact three years ago with myself to live on a similar budget to when I was a student, which is still going strong despite me now earning quite a lot more than most of my similarly-aged friends. I really, really appreciate having had the ability to build-up savings through thinking carefully about money, so that the unexpected bills and general life costs (e.g. rent deposit, agent's fee etc) can be covered without my resorting to debt.

Sorry if this is frank, but I really think you have multiple opportunities at this moment in time to re-think your financial future. Perhaps you have some assumptions and personal paradigms to challenge, but you can only get a better quality of life as a result.

Debt_Free_Chick

Eoin_McLove wrote:

(N.B. my girlfriend and I pay half each on things we share, e.g. rent, bills, etc., but the following is just what I will spend - also, the budget is based on what I've spent this year [I've been keeping an 'expenditure spreadsheet' since I started my MA last September], plus a bit more where applicable, so it is 'scientific', not just airy-fairy forecasting )

I'm sorry, I'm being thick here. Are you saying that the total household bills are double what you've listed? So you're paying e.g. £600 for gas/electric, of which your share is £300?

At the risk of being a pain, you really need two budgets. One for the joint household expenses and another for your "personal" spends - this would include "£x contribution to joint household budget". But we'd like to see both, so we can see if whether we can save you money.

For example, are you saying that you spend £35 a week, between you, on food ..... or £35 each, making a total of £70 a week?

Honestly, we want to try and help with your budget. Trust us ...we're good at it :j

Eoin_McLove

Basil Hume, thank you for your thoughtful advice.

Of course, no career is predictable, particularly one with exams, as you say. I don't really have an answer, but I can say that I am determined to succeed (who isn't?) and have an excellent academic record (bighead), so I'm quite confident that I can pass my exams, though not necessarily first-time every time. But, of course, nothing's certain, I agree.

My starting salary (£15,500 gross) is actually slightly above average for Kent (£14,000 to £16,000 is the norm). I turned down £21,500 for Big 4 firm in the City because London wasn't for me whilst training. I was brought up in Dover, Kent, so I'm well-aware of the cost of living in the South East. Cheaper than London, that's for sure. Also my firm (Creaseys) has a 100% pass-rate for its trainees, and are meticulous in whom they employ (three ACA trainees taken on each year out of 250 applicants; a higher ratio than most Top 20 firms). I could be a precedent, of course.:o

I don't have a car; I pay my share of the petrol on my girlfriend's.

Pre-paid prescriptions are around £93.50. Whilst I said in my budget that I spend £117 on my inhalers, in fact I made a mistake; actually I only spend around £72.

NTL digital TV is only a very small percentage of my annual NTL expenditure. NTL digital is £5.50 per month (most of NTL expenditure goes towards broadband, which my girlfriend and I need), which split between my girlfriend and me becomes virtually negligible. I'm not too bothered about saving £33 a year if it means I lose UKTV Gold etc., not to mention a high-quality tv reception.

Thank you for your advice though. I appreciate it, and I take it all on-board. As I've emphasised, I wouldn't take out a sizeable loan without thoroughly looking at all my options. Many graduates are careless when they come to take out loans, I agree, but I'm pretty systematic and methodical when it comes to budgeting.:beer:

Eoin_McLove

Debt_Free_Chick: yeah, everything on there is my estimated share of expenditure. So, yeah, total gas/elec etc. is £600, double my £300 (this figure is based on my outgoings this year, but I live with two other people, so I have probably overestimated by anything up to 40%, perhaps). My girlfriend and I buy our shopping separately; it's just easier that way!

This is purely my budget, what I spend alone. What my girlfriend spends is her business, and it doesn't affect what or how I spend. Likewise, the loan I might be taking out is purely for me. Mwahahaha. So, just ignore my girlfriend.

Also, to be honest, I don't think I have the potential to save that much. As it is, I'm very careful with how much I spend on the essentials (except food: no compromises on my food!), so I don't think I could knock it down much further. My problem lies simply with whether or not to take out the necessary £8,000 loan, or anything up to £14,000, to give me more dosh over the next couple of years. Hey, I've read Martin's Money Diet book, so I'm not an ignorant consumer. If I were, I wouldn't be here.

Ta again.