is a debt consolidation loan the answer?

Dave75

Hello,

I'm hoping someone can advise me on the best way to get my debt down, I'm finding its a minefield out their with so many different opinions/options.

I have around 5k over 4 Credit Cards, with them all now incurring interest. My total min payments are around £100 a month. I live at home, dont have a mortgage. My main outgoing is £300/month for a car which will be paid next June. I have checked a few online loan calculators and they have come back with payments which is just a bit more than what my min payment is, so I can then say to myself that if I got that I would be debt free in 5 years, although I appreciate I need to get rid of the cards and also I doubt I would get the loan rate advertised. Plus each time I apply its going to leave a footprint on my credit file

Other options I considered were moving the debt about to 0% cards or life of balance cards which will be cheaper than a loan, however I fear I will run out of cards to do this eventually or the credit limit wont be enough and the fact I have 4 already may hinder this.

If it helps my experian credit score is 999, no late/missed payments or defaults ever. Although I know this does'nt mean much as each lender judges on different criteria.

Any help appreciated.

Dave

di3004

Dave75 wrote: »

Hello,

I'm hoping someone can advise me on the best way to get my debt down, I'm finding its a minefield out their with so many different opinions/options.

I have around 5k over 4 Credit Cards, with them all now incurring interest. My total min payments are around £100 a month. I live at home, dont have a mortgage. My main outgoing is £300/month for a car which will be paid next June. I have checked a few online loan calculators and they have come back with payments which is just a bit more than what my min payment is, so I can then say to myself that if I got that I would be debt free in 5 years, although I appreciate I need to get rid of the cards and also I doubt I would get the loan rate advertised. Plus each time I apply its going to leave a footprint on my credit file

Other options I considered were moving the debt about to 0% cards or life of balance cards which will be cheaper than a loan, however I fear I will run out of cards to do this eventually or the credit limit wont be enough and the fact I have 4 already may hinder this.

If it helps my experian credit score is 999, no late/missed payments or defaults ever. Although I know this does'nt mean much as each lender judges on different criteria.

Any help appreciated.

Dave

Hi Dave and welcome

You will find that this thread is very helpful and will lead you in the right direction.

I am no expert on here, but have received help when required - they have been excellent and a godsend.

Hopefully someone will be along soon to help, good luck.;)

Tixy

is a debt consolidation loan the answer? - rarely, as it usually does not address the cause of the debt, which is spending more than you earn, and whilst an APR may be lower as the loan is over a long period the amount you pay in interest can often work out as more.

Hi Dave
Its difficult to say without knowing a lot more about your position. What are the balances, credit limits and APRs on each of your cards?
How much do you pay currently? Are you just paying the £100 minimum payment? Have you worked out a monthly budget to see what is the maximum you could put towards your debt each month? have you worked on reducing other outgoings and expenditure?
How much do you earn?
When you say live at home do you mean with parents? do you expect to stay living at home for the next 5years that the loan would be over?

Before you make any decision I would complete this to see how much surplus cash you have each month - http://www.makesenseofcards.com/soacalc.html
Then you can work out the best way to tackle your debts.

one_hot_minute

A £5k loan at 9.9% will cost you £104.95 per month over 5 years. The full amount paid would be £6296.16. This is based on a Credit Union loan, but if you have a good CR, you may get a better rate at your bank. The good thing about the CU loan would be they would pay directly to the CC companies and avoid the temptation of dipping in or treating yourself from the loan!

Martins minimum payment calculator shows that if you paid off the minimum payment each month, basing your card APR at approx 15%, it would take you 36 years and 4 months to clear and the full amount paid would be £11,838

You MUST cut up your cards though and not use them again. Keep the lowest rate card for emergencies or for extra protection making larger purchases, but set your limit to be quite low on the card.

It's a no-brainer if you have the willpower not to use the cards again and reset your values to debt. If not, it becomes a short term fix and the problem simply escalates. Only you know the right route here. Speak to the CAB or debt specialist before making hasty decisions.

Poosmate

Consolidation loans are rarely (if ever) a good idea. Most of us on here have been there and done that and find the credit card's get used again (just this once and I'll pay it off at the end of the month). Plus, as you seem to already know, consolidation loans don't normally offer an attractive interest rate.

Personally, I'd try to get at least one of your credit cards paid off completely, you may find they will offer you another 0% interest deal as your balance reduces.

Use this site to work out which card to pay off first:

http://www.whatsthecost.com/snowball.aspx

Use it as a guide. The debt free date it gives me is kind of scary but I know I can pay off a little more some months and will be able to shuffle my debt around to 0% interest deals and also to pay off larger chunks every now and again. So I take my date as a worst case scenario.

The most important thing though is to STOP using the cards. I was only using mine for car tax, insurance, breakdown recovery and it just didn't twig that I wasn't paying enough off the card each month to cover those costs never mind the interest as well so my debt was getting larger without me even realising! I think it's a psychological thing, you don't use the card on a regular basis so you believe you are paying off your debt.

For me, because I had very little disposable income and was not knowledgeable about these things at the time, it took me a couple of years to be able to save enough to cover these bills annually and be able to stop using the cards altogether!

Hope that helps.

Poo

Dave75

Hello.. Thanks for the warm welcome and advice in such a short time!

If I understand it correctly with the loan consolidation issue is that i've lived a bit beyond my means and its finally catching up with me. If I got a loan at a decent rate, cut up my cards and never used them again then that is an acceptable solution? Its all about personal will power, if I start spending again on cards then the situation is just going to escalate.

I will have a look at the whatsthecost website.

Thanks,
Dave

samhuzz

Dave75 wrote: »

Hello.. Thanks for the warm welcome and advice in such a short time!

If I understand it correctly with the loan consolidation issue is that i've lived a bit beyond my means and its finally catching up with me. If I got a loan at a decent rate, cut up my cards and never used them again then that is an acceptable solution? Its all about personal will power, if I start spending again on cards then the situation is just going to escalate.

I will have a look at the whatsthecost website.

Thanks,
Dave

Would your bank not be able to help if you've been with them for a long time and have a good credit history?

Poosmate

Dave75 wrote: »

Hello.. Thanks for the warm welcome and advice in such a short time!

If I understand it correctly with the loan consolidation issue is that i've lived a bit beyond my means and its finally catching up with me. If I got a loan at a decent rate, cut up my cards and never used them again then that is an acceptable solution? Its all about personal will power, if I start spending again on cards then the situation is just going to escalate.

I will have a look at the whatsthecost website.

Thanks,
Dave

Exactly! But do you have the willpower to not be tempted to get another credit card within the next five years?

Also, another very good reason for not tying up your debt into a consolidation loan is that in 12 months time you will have paid off your car loan and will have £300 per month to pay off your credit cards sooner than the 5 year consolidation loan. By keeping them on the CC's you are keeping them more flexible.

The good news is at least you have admitted to yourself that you've lived beyond your means (I guess we've all done that) so the next step is to cut back and live within your means.

Good luck

Poo

ETA: Forgot to add, beware of Low Life Of Balance cards! They are fab low rates but you will find the minimum payments are set so low you may only be paying a couple of quid off your debt each month, the rest is interest. I use my Low LOB card just to free up extra cash to pay off my higher rate cards.

Tixy

Dave75 wrote: »

Hello.. Thanks for the warm welcome and advice in such a short time!

If I understand it correctly with the loan consolidation issue is that i've lived a bit beyond my means and its finally catching up with me. If I got a loan at a decent rate, cut up my cards and never used them again then that is an acceptable solution? Its all about personal will power, if I start spending again on cards then the situation is just going to escalate.

I will have a look at the whatsthecost website.

Thanks,
Dave

If the loan is a cheaper rate than all your existing debts, if it allows overpayments (in case circumstances improve) and (the biggest if), if you definitely do not spend on the cards, get another card or overdraft in the next 5years then yes it can work out cheaper.
People generally are against them as the typical experience on here is that people have consolidated once (or twice) before realising they are still overspending and are not actually paying down their debts as quickly as they could.

Even if you choose this route I would still work out first what you can afford each month, as if you can afford a little more each month and can get a 4year loan then you will pay much less in interest.

You also need to consider how likely you are to get a loan. I note your credit score is good but you need to think about your debt to income ratio and your credit to income ratio.

What is the total amount of credit you currently have? (credit limits on all cards, overdraft, car loan etc). If you take this amount and add on the £5k loan you want to take how does that compare to your income?
If it takes you above 50% of your income you may find it tough to get a loan.

one_hot_minute

Tixy wrote: »

If the loan is a cheaper rate than all your existing debts, if it allows overpayments (in case circumstances improve) and (the biggest if)

Most Credit Union loans will allow overpayment. The added bonus is also that due to interest being calculated daily, as opposed to annually, if you overpay, you pay less interest as it is not front loaded. Check T&C's and clarify with lender though before applying.

Tixy

Credit union loans tend to be for much smaller amounts than the £5k the OP is looking for (although I would agree its not unheard of for them to lend this figure - but up to around £1k is more common), also many credit unions want you to start saving with them for a few months before they will loan to you.
And credit unions are often not the most competative - with some charging the maximum they are allowed to of 2% per month.

But I agree, most important with any agreement is to read the T&Cs and make sure you understand them!