Quick Snowballing Question..

jessicamb

Hi All

Just a quick question that I would appreciate your opinions on.

Now I've cleared off the cc I can afford to throw about another few pounds a month at debt repayments. They are as follows:

Tesco Loan 6.8% APR total balance remaining £2940
Mortgage approx 5.8% APR off the top of my head remaining just shy of £76500.

The snowballer is telling me I should pay off the loan first as it has the higher APR but I think the mortgage (1 year into a 30 year term) could be a better option as anything I pay now will be worth roughly double that over the length of the mortgage.

Or do I cut the difference and go 50/50? I can overpay on the mortgage by about £70 a month while its fixed rate without incurring charges.

What do you think?

southernscouser

I think you should use the money to pay off MY loan!

Nah seriously I would pay it off the loan. Your mortgage is gonna be with you alot longer than the personal loan so I'd want to get rid of that first so I could soley concerntrate on the biggy!

CLAPTON

assuming the loan is flexible and you fully benefit by overpaying, pay the debt with the highest APR..once you have cleared that then overpay the mortgage.

ZTD

jessicamb wrote:

The snowballer is telling me I should pay off the loan first as it has the higher APR but I think the mortgage (1 year into a 30 year term) could be a better option as anything I pay now will be worth roughly double that over the length of the mortgage.

That's only assuming you let the mortgage go for the full term of 29 years, but only let the loan go for five (or however long it is). Over identical periods of time (which is the way you should look at it), the loan works out more expensive. Pay off the loan (check for penalties), then overpay the mortgage.

Then come back here and gloat... :j :j :j

Dr.Shoe_2

I'd pay off the loan and then put the amount you currently pay off the loan with towards the mortgage.

Arch-Angel

CLAPTON wrote:

assuming the loan is flexible and you fully benefit by overpaying, pay the debt with the highest APR..once you have cleared that then overpay the mortgage.

To carry on a debate from an earlier thread, if the interest rates were reversed (and the loan had the lower APR rate) would you then say to pay extra off the mortgage?

CLAPTON

Apologies for highjacking this thread for one post....

Arch-Angel

assuming all things equal and specifically that the interest charged is based directly on the amount outstanding then pay off the loan with the highest APR...so the answer is yes i would then then pay the mortgage in the case you propose..the size of the loan is irrelevant.

try this: suppose you have two loans

1000 at 5%
9000 at 20%
i would pay the 9000 loan rather than the 1000

now consider you had
1000 at 5%
and 18 separate loans of 500 each one at 20%
what would you pay off?

if you model the two situations on a spreadsheet you will see that one loan of 9000 at 20% is no different from 18 loans of 500 all at 20% all other things being equal

Arch-Angel

CLAPTON wrote:

Apologies for highjacking this thread for one post....

Arch-Angel

assuming all things equal and specifically that the interest charged is based directly on the amount outstanding then pay off the loan with the highest APR...so the answer is yes i would then then pay the mortgage in the case you propose..the size of the loan is irrelevant.

try this: suppose you have two loans

1000 at 5%
9000 at 20%
i would pay the 9000 loan rather than the 1000

now consider you had
1000 at 5%
and 18 separate loans of 500 each one at 20%
what would you pay off?

if you model the two situations on a spreadsheet you will see that one loan of 9000 at 20% is no different from 18 loans of 500 all at 20% all other things being equal

Yes, apologies for the hijacking (we're thrashing out how to snowball )

First off, you're right - paying off the higher interest rate first will save you more money in the long run. I modelling out a few different random scenarios via Excel (note: my snowball calculator is not the most flexible, but is simple to use) - what I found was that the more "snow" you've got the more you save by paying off the higher rate first.

Ok, fairly obvious that one!! But what I also noticed was that if the amount of "snow" that you've got is quite small (10-15% of the minimum payments or less) then the saving you making by paying off the highest rate first is very small. Small enough, in my opinion, to make it essential that an individual modelled the snowball plan first to see that there would be a saving.

That's what I mean by the psychological aspect - the sight of the first loan/CC being cleared can be a powerful motivational factor for many people as it firstly clears a debt and secondly generates more "snow" for the next debt (which can, of course, then become the highest interest rate).

In short, I've never tried to argue that paying off the lowest balance first was the cheapest option. However, the psychological aspect of clearing a debt cannot be overlooked - particularly if the available "snow" is very small.

PS - I'm not trying to start a flame war!!! :beer:

CLAPTON

as this comes up a lot i think its a worthwhile exchange....
if the 'surplus' (i.e. repayment over the minimum) is small then as you say it makes little difference.
however, my view is that the message should be clear ...that is, to pay the debt with the highest APR off first and then in descending order of APR. if the particular person feels there is psycholological benefit in doing something different then fine ..thats their informed decision...which is really by point i suppose....let each person make their own decision but based on the correct information.