Consolidating debts

scott9678

As a newbie to the forums, I just wondered what people think is the best thing to do.

My wife and I have just under £8,000 owed on credit cards, and Ive just done the minimum repayment calculator which has scared me!! At the moment I can only really afford the minimum payments but a 5 year loan would clear the cards for around the same monthly amount( if I get the loan).

It seems so simple, but my wife's not sure. Any help and advice would be much appreciated.

Tixy

Hi

Well the first possible stumbling block is a lot of people struggle to get consolidation loans in the current climate. Obviously it depends on your level of debts and income etc (as well as your credit history) but for a lot of people by the time they realise they want to consolidate they already owe a lot of money relative to their salary.

When you apply for a consolidation loan any potential lender will view this as additional credit on top of all that you currently have - this is because you might just blow the new loan or might run up cards/overdrafts again. So they assess if they think you can afford to service twice as much debt.

That point aside generally consolidation loans are not well recommended on here - all too often people end up running up the debts again or not tackling their spending.

Have you done a snowball calculator based on your current debts and APRs (a snowball is where you pay off the most expensive debt first and keep your payments at the current level - i.e as the minimum decreases you still keep the payments at the current level). If you haven't tried it then worth doing that to see how long it will take to clear the current debts. http://www.whatsthecost.com/snowball.aspx

What debts, APRs, balances and limits do you have? you might be able to shuffle some debt about to make it slightly cheaper overall. Another option might be to see if you could get a new 0% balance transfer card and shuffle some debt on to that (again it depends on whether you would be accepted or not).

(sorry a slightly longer reply than I intended - a bit of waffling!)

scott9678

Cheers for the help. To be honest Ive not looked into it as much as that. Ive got a Barclaycard which often does deals where you transfer to them and get a lower rate. Ive got enough credit left on that card to have the majority on it.

DVardysShadow

The problem with taking a loan to clear cards is that you are immediately on a treadmill of higher regular payments, which leaves no slack if you have a financial emergency. So this in turn can lead to a need to take out further loans to cover a difficult time. This loan will probably be on worse terms than either the original cards or the replacement loan [payday loan?], putting you very firmly into the mire.

If you must do it, then only take out a loan to cover say 30% of your debt and use it to pay down the highest APR credit.

bigturnip

Tixy wrote: »

Hi

Well the first possible stumbling block is a lot of people struggle to get consolidation loans in the current climate. Obviously it depends on your level of debts and income etc (as well as your credit history) but for a lot of people by the time they realise they want to consolidate they already owe a lot of money relative to their salary.

When you apply for a consolidation loan any potential lender will view this as additional credit on top of all that you currently have - this is because you might just blow the new loan or might run up cards/overdrafts again. So they assess if they think you can afford to service twice as much debt.

That point aside generally consolidation loans are not well recommended on here - all too often people end up running up the debts again or not tackling their spending.

Have you done a snowball calculator based on your current debts and APRs (a snowball is where you pay off the most expensive debt first and keep your payments at the current level - i.e as the minimum decreases you still keep the payments at the current level). If you haven't tried it then worth doing that to see how long it will take to clear the current debts. http://www.whatsthecost.com/snowball.aspx

What debts, APRs, balances and limits do you have? you might be able to shuffle some debt about to make it slightly cheaper overall. Another option might be to see if you could get a new 0% balance transfer card and shuffle some debt on to that (again it depends on whether you would be accepted or not).

(sorry a slightly longer reply than I intended - a bit of waffling!)

So the advice is not to take out a loan because the OP might run up debts on their cards again, but to take out a new credit card, most likely at a higher rate than the loan, and free up the old cards for new debts to be run up on. Sorry, but I can't see how that is good advice.

bigturnip

DVardysShadow wrote: »

The problem with taking a loan to clear cards is that you are immediately on a treadmill of higher regular payments, which leaves no slack if you have a financial emergency. So this in turn can lead to a need to take out further loans to cover a difficult time. This loan will probably be on worse terms than either the original cards or the replacement loan [payday loan?], putting you very firmly into the mire.

If you must do it, then only take out a loan to cover say 30% of your debt and use it to pay down the highest APR credit.

Did you read what the OP wrote? The loan repayments would be 'around the same' as the current minimum payments for the credit cards, how exactly is this a treadmill of higher repayments?

scott9678

The loan I've seen is around 8 or 9%, and in doing so they will be clear in 5 years, not something like 25 years which is what the repayment calculator said on this site. If I then get myself another card and start using that then that will be my own stupid fault and I will never get to the position that I want to be. The question is do I commit to paying out what I am now for 5 years, or do I wait to see if next year or the year after I have a bit more spare cash to pay more off the cards? And there is no guarantee that will be the case!

AllThatStuffIsJustStuff

Hi Scott,

Welcome to the forums. Despite the seemingly conflicted advice here I think there is a common unstated underlying theme, which is that the solution either way depends on your spending. The best thing to do is provide a fuller picture. Have a look on the forums at people who have posted their Statement of Affairs. Do one yourself and post it. It will help people on the forum give better advice. The loan you are looking at may make sense if your spending is tight but controlled. If not though, there may be better options.

Best if luck.

scott9678

Thanks, I'll have a look at that

bigturnip

scott9678 wrote: »

The loan I've seen is around 8 or 9%, and in doing so they will be clear in 5 years, not something like 25 years which is what the repayment calculator said on this site. If I then get myself another card and start using that then that will be my own stupid fault and I will never get to the position that I want to be. The question is do I commit to paying out what I am now for 5 years, or do I wait to see if next year or the year after I have a bit more spare cash to pay more off the cards? And there is no guarantee that will be the case!

If you're the sort of person that wants a fixed monthly cost and the least hassle then the loan could be the best option. You can get loans with no early repayment fees meaning you can pay off more as and when extra money comes in.

If you keep on top of things and don't mind putting a bit of extra work in you could be better off shifting the debt around with balance transfer deals, but you will need to keep on top of it. Again you can pay off extra as and when you want.

The one thing you shouldn't do is wait and carry on paying minimum payments while on standard credit card rates.

Xbigman

If you can only afford the minimum payments now and a new 5 year loan will keep the payments about the same then you are still on the edge of affordability. You need a loan that works out cheaper to give yourself some slack. Then you need to budget properly and make sure that slack is tucked away in an emergency fund for a rainy day. That allows you to cut up all the current cards. As already said, the biggest problem with consolidating like this is that the cards get run up again.
And all that assumes you can get a cheap loan to start with.

Personally I prefer the snowball method. Start budgeting properly and then pay off whatever extra you can (above minimum payments) from the highest APR debt. Shift as much debt to lower APRs as possible. Not just zero % but if you have an 18% card and a 20% card then max out the 18% and pay the same amount off the 20%. This method is about small steps to start with but huge strides at the end. As you clear the first debt the extra motivation on the next one is massive.
Snowballing may look the more expensive option, and it certainly is at the start, but it can work out far better in the long run.





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