Which debt should I pay off?

barryjohnsmith

Hi

I'm shortly coming into some money and I'm basically wondering whether I should use it to pay off credit cards or to pay off my motor loan.

I owe around £9,000 on credit cards, but these are all on low rate for life (5.9 / 6.9%). I also have a motor loan I took out a couple of years ago for £7,200. I still owe around £6,000 on that and the APR is 16.2%. I've been quoted a resettlement figure of just under £5,200.

My wife suggested paying off the loan first then using the rest of the money to make some inroads into the credit card debt. However, my instinct is to pay off the card debt because the interest has already been applied to the motor loan from the outset - I can't see any benefit in paying it off early.

What do you guys think?

Cheers,

Barry.

JasonW_2

Woah 16.2% for a loan!? Definitely pay it off, or find some other way of getting the APR down, even if its sticking it onto an egg card if you have one, or see about getting a low rate loan. You will still be paying interest on the loan, but I know what you mean, you have paid more towards the interest at the start. Clearly paying it off in full would be the best choice, as you can then use any spare cash towards savings, or chipping away at the CC debt. This is only my opinion and Im no expert on this

JW

barryjohnsmith

Cheers JW - I know it was a really bad rate now. Rather foolishly, I just looked at the monthly repayment and signed the form the dealer gave me. But I was totally ignorant of the huge differences in interest rates when I bought the car - it certainly pays to educate yourself!

JasonW_2

Hindsight is a great thing, but at least you can cut your losees to an extent and try and save some interest. I would wait and see what others suggest though, as there always simple things that get overlooked, that others spot right away, but in this case, I think the advice will be the same to switch lender or clear off the loan totally. The life of balance card are a decent rate, but of course, if your credit is good, you could maybe try and get a 0% rate such as capital ones 15 or 18 month 0% offer, currently doing the rounds in certain magazines, so all your payments are going towards the debt.

almahadeus

Why not apply for a Texaco card and move as much as poss of credit card loans to their 3.9% life of balance rate before it closes some time soon.

westernpromise

barryjohnsmith wrote:

I also have a motor loan I took out a couple of years ago for £7,200. I still owe around £6,000 on that and the APR is 16.2%. I've been quoted a resettlement figure of just under £5,200.

I think we need a bit more info here. How much do you usually pay towards the credit cards per month? How many more loan instalments are there and how much is each instalment?

In principle you always hit the worst first, but from what you've said it may be that your loan terms mean you only save £800 by paying that off.

Tony_H_3

Assuming you are paying your CC's @ £180 / month the following table demonstrates how much you would save in £1000 reductions on your total balance. This may help you to make a more informed choice.

lipidicman

So this loan is 'rule of 78' and has a built in exit penalty (ie as you say you pay more interest early on than you would with a daily interest calculation)? You must do the calculations (or give enough info for somebody here to do them) to work out which saves you the most money, thats all there is to it!