Which debt to pay off first?

Sallyd_2

Hi guys - any help or advice you can give me would be greatly appreciated!

I owe approx £2400 on a loan I took out 4 years ago. I'm paying it back at £106 per month.

I also owe just under £4000 on a credit card, and at the moment I'm paying back the minimum, which i think is about £65 per month.

I've decided to empty an ISA I've had for a while (but didn't know about - long story) to pay off some debts, so have £3600 to pay debt off with.

Should I pay off most of the credit card and keep going with the loan, or pay off the loan in full and start paying more back on the credit card?

I really am clueless about money and can't ask my family for advice on this, so I'm not at all sure about what to do....

RAS

Hi

You pay off the debt which has the highest APR. Look at the snowball on www.whatsthecost.com

happycamel_2

Hi,

Pay back the one with the highest interest rate first. If you're not sure post the details on here and we'll tell you.

From what you've said so far it's likely the credit card is higher interest so pay that off first. Then you'll have £400 to knock off it. Try doing that as quickly as possible (if you post an SOA we can advise how to cut down your spending) so you get charged as little interest as possible.

Once the credit card debt is gone switch the £65 to overpaying the loan - don't just spend it!

Good luck

InDeepDebt

Out of interest, how much was the original loan for, what is the current balance (or is that £2400) and how long has it to run?

Jim

Sallyd_2

It was for a loan of £5000 over 5 years. I think it was at 6% interest.

I've been paying it off for just over 3 years.

InDeepDebt

I'd pay the majority of the credit card off.

Doing figures - assuming that you're paying 1.2% interest on the card per month, that's £48 a month interest out of your £65 - so you're paying £17 off the debt per month.

If you pay the money onto the loan - you'll have £1200 left to put onto the card reducing the balance to £2800. You'd be able to pay off £171 a month with about £33 ot this being interest. In approx 19 months you'd be debt free.

Pay the money onto the card (leaving a balance of £400) - keep paying the £65 and you'd pay off the card in approx 7 months. Keep putting the £65 to one side and in approx 17 months you'd have enough to pay the remainder of the loan.

That's my very crude calculations using MS Excel.

Jim

stephbond89

as others have said, pay off the one with the highest interest first, BUT before you do that, do you have any arrears on council tax, rent/mortgage, hire purchase loans, or bills like water? If you do pay those off first as they are priority debts. Others cannot force you to pay them back, whereas priority debts have much bigger concequences of not paying

after that, you may want to pay off a bit of each debt and try to lower their repaymnents by doing it, or pay off one of two debts to lower your monthly outgoings. But as others have said, pay off the one with the highest interest first and go down the list leaving the 0% interest cards or lower interest loans etc as those debts will only reduce no matter what your paying monthly! :)

bottleofred

Hi Sallyd,

As the others have said, pay off the one with the highest interest, which is likely to be the credit card (but check the interest rates first!). Good luck on becoming debt free.

Hannah_10

Sally check the interest on that loan as 6% isn't a figure that's used a lot, not to say you don't have an interest rate of 6%, just with it being a bit unusual definately check it. As others have said, find out the interest rates (the APR's) and pay off the highest one first.

One other thing, have you been making proper repayments on the loan and the card lately? If not they might take a lower amount to settle the account, meaning your ISA would clear both debts off and maybe even have a tiny bit left over.