Pay Off Debts With Savings Article Discussion Area

Cell

Paulgonnabedebtfree wrote: »

Sorry to resurrect an old thread but Martin's advice about paying off debts with savings holds good generally.
However, there is a proviso in his article about ensuring that the money is re-borrowable in case of emergency. Credit cards are specifically mentioned as being reasonably reliable for this - though it may not be possible to get another personal loan.
In view of the way some credit card companies have been slashing credit limits and/or cancelling accounts - even for people who appear creditworthy, I wonder if the time has come for Martin to revamp this old article to highlight this side of things a lot more. When it was originally written, card companies were still increasing limits with relative ease - or at least not decreasing them. Things have changed and I am asking Martin to acknowledge this in his news item that started this thread.
I feel that many people may need to keep some extra money in reserve only pay down debts until that reserve level has been reached. This is certainly the case with myself as I've no idea when another card company might suddenly pull the plug on an account - even though I have no defaults and no late payments. This is particularly so with my being self-employed and needing to keep an oldish van mobile and never being certain when a big repair may be needed or some tools may need replacing.

Likewise, sorry to bring the thread back, but I thoroughly agree that the advice needs to be re-written in an environment where credit limits are slashed, APRs increased willy nilly and accounts are being closed to avoid these increases.

I have savings that will pay off half my debts. Why would I do this when there's a good chance that the credit limit will be cut sooner of later because I'm 'not using it'?

It's a tightrope walk really, and shows much things have changed since the thread first started. Is saving the interest worth the disaster of not having anything to fall back on at all?

soozie1978

I think I get where Martin is coming from but from my point of view, im kinda stuck.

Ive moved back with parents in order to save for a deposit with my husband. We should have about £33-35k by early next year. We also have debt. Student loans, car loans, wedding loans. Although people say pay off debt, when it comes to applying for a mortgage, surely the bank would prefer customers who have shown they have loans and never miss a payment, together with a deposit, compared with a married couple who have fewer loans but NO deposit - in which case wouldnt get a mortgage anyway.

anyone else agree?

DVardysShadow

soozie1978 wrote: »

... anyone else agree?

No. Debt is negative savings. If you had £20,000 deposit and £30,000 loans, I would prefer the couple with £5,000 savings and no loans. They are £15,000 ahead of you.

Debt is worse than negative savings when it comes to a mortgage.If you borrow £X on a loan, you will pay back £Y/month. This £Y/month comes straight of your affordability. And crucially, because mortgage interest is lower than loan interest, your available mortgage will be reduced by substantially more than £X.

Cell

DVardysShadow wrote: »

No. Debt is negative savings. If you had £20,000 deposit and £30,000 loans, I would prefer the couple with £5,000 savings and no loans. They are £15,000 ahead of you.
.

Except to access mortgage funds you will usually require at least a 10% deposit regardless of being debt free.

It's more complex than that, and relates to affordability etc, but the basic principle is that putting down a deposit will make a lender more inclined to take you on because, in the event that your circumstances change there is equity in the property, meaning they're more likely to get their money back in the long run.

Mr_Maz

OK, So I have a similar quandry
By next pay day I will have around £28k saved and will be saving around £2k a month for the rest of the year (minus 1 month of savings to pay for holiday expenses)

Currentyly I have the following debts

Mortgage - £130K which drops to 2.5% next month
Car PCP - £11.3k outstanding £10.5K settlement
Home Equity Share - £30k zero payment and interest free till 2019
CC1 - £5.5k interst free till december
CC2 - 1.5k 15% apr (this needs to paid off!)
Personal loan £2k @9.9% - Ends in November


I was thinking about paying of the Loan along with CC2, but the savings are so small.e

I'm renting my house out and living rent and bills free all year as part of a relocation package, and was thinking about buying another house next year.

What to do?

thanks for any advice

Maz

A1700AW

I'd say pay off CC2 and Personal Load and then put the rest into paying off as much of the mortgage as possible till December. At that point, pay off CC1. Reducing your mortgage even further should reduce what you need to pay per month, allowing you to save even more.

Anthorn

I agree that it is sensible to pay off debts rather than save due to the saving on interest.

But there is an exception and the situation I find myself in: Where a payment plan has been agreed with a debt collection agency, no interest is applied to the debt and income has increased to the point where there is a residual income. There are basically two routes to take. Use the residual income to pay off the debt faster or save it. Personally, I see no reason to use the cash to pay off the debt faster because everyone is happy with the payment plan, the debt will fall off my credit report in a year and increased payments will not change that. So I save it, gain the interest and have cash to fall back on in an unforseen event.

vickie6672

Hi,

My partner and I are wanting to buy a house. We have been offered money from a parent to help with a deposit. Question is should we use the money for a deposit or pay off some of our outgoing debts and then save the money for the deposit with what we would have been paying on the debt each month?

Basically I have a car loan with a settlement figure of £7400. My partner has a bank loan with a settlement figure of about £7000. We could pay these both off and then save the £570 each month we would have been paying for a deposit.

I don't know if paying the debts off early would affect our credit rating in a negative way? Or is it best to have less debts on your credit file when applying for a mortgage and just have to wait around 2 years before buying due to saving the deposit back up?

Suggestions and advice is very welcome please!!!

black_taxi_2

Any debt is difficult--- because it's ontop of your monthly expenses-there's unknowns out there-banks thrive on 3k to 5k loans-keep you in debt forever.

The real issue is monthly budgeting-slowly but surely getting rid of debt.

I learnt that lesson late in life

manrow

I am at the other end of the spectrum.
Aged 69, married wife retired too.
Pension income at bottom end of higher rate tax.
Mortgage just over £100k
CC Debts £21k

Just received legacy of £9,500.

Looks like pay off CCs first?