Order of Loan Repayment

katmandu71

I have two loans.

One, a standard personal loan. It has an interest rate of 11%. The outstanding balance is £4300. I have two years of repayments left on this loan.

The second, an unsecured element of my mortgage. It has an interest rate of 4.8% and an outstanding balance of £19,000. I have about 19 years of repayments on this loan.

I have about £5000 in cash and want to pay this into my debts. My instinct is to pay the £4300 loan - but all I will save here is the "standard rebate".

What is the best plan? To clear the lower loan with the higher interest rate and shorter repayment period - or to save interest by paying into the larger loan with the lower interest rate and longer loan period...

Thanks for your help.

debtcutter

katmandu71 wrote: »

I have two loans.

One, a standard personal loan. It has an interest rate of 11%. The outstanding balance is £4300. I have two years of repayments left on this loan.

The second, an unsecured element of my mortgage. It has an interest rate of 4.8% and an outstanding balance of £19,000. I have about 19 years of repayments on this loan.

I have about £5000 in cash and want to pay this into my debts. My instinct is to pay the £4300 loan - but all I will save here is the "standard rebate".

What is the best plan? To clear the lower loan with the higher interest rate and shorter repayment period - or to save interest by paying into the larger loan with the lower interest rate and longer loan period...

Thanks for your help.

Do both of the loans allow over payment/early redemption?

If either of them charges for early/over payment then what are penalties?

somethingcorporate

Higher interest rate first.

chesky369

Clearing one loan completely could help with your credit situation if you find you need to take out further credit in the future. But you should definitely double-check the terms & conditions first.

katmandu71

No, there are no penalties for repaying loans early.

The mortgage linked loan allows over-payments. The other loan doesn't allow monthly over payments but I can request a redemption figure and clear the debt. The "statutory rebate" is deducted from the total repayment I would have paid had I let the loan run its course.

chesky369

There's a psychological factor here also, in that you might feel better about life in general if you only have your mortgage to pay and not a personal loan. What you could do is pay the loan off and then put the monthly instalments you would have paid to the bank towards your mortgage repayments.

chesky369

... sorry didn't make myself 100% clear - I meant not towards your mortgage repayments, but as an additional payment to your regular repayments.

katmandu71

chesky369 wrote: »

There's a psychological factor here also, in that you might feel better about life in general if you only have your mortgage to pay and not a personal loan. What you could do is pay the loan off and then put the monthly instalments you would have paid to the bank towards your mortgage repayments.

Yeah that's what I was thinking of doing. Was just wondering if clearing a chunk of the longer loan would be more beneficial in the long term (i.e. amount of interest saved) compared to the standard rebate I'll get knocked off for early paying the smaller loan.

chesky369

Well, with a mortgage if you have 19 years left, you also have to factor in inflation, so that your repayments become less over the years compared to your income.

CLAPTON

sorry it's an absolute no brainer

pay off the debt with the higher APR; in this case the loan with 11% interest rate

katmandu71

CLAPTON wrote: »

sorry it's an absolute no brainer

pay off the debt with the higher APR; in this case the loan with 11% interest rate

Haha thanks. That's what I'll do.

Thanks to everyone who chipped in.

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