Please help me kill my overdraft(s). I've come up with three options!

primrose_primrose

So as a young over indulged, short sighted student i took out not one but TWO student overdrafts with two different banks (naughty i know). I maxed them both out at £2,000 and have been living with the £4,000 total debt for three years now, always only paying of the overdraft interest which seems to be about £30PCM for each one.

I would really like to finally grow up and beat these monsters and would appreciate your advice on the best method:

1.Take out a personal loan and pay off and close the overdrafts. RBS offered me £4,000 over five years for £110pcm. The total repayments equate to £6,600 or another £2,600 of debt. The attraction of this is that i have a manageable fixed monthly payment to adhere to.

2. I’m pretty sure i’m getting screwed on the above deal and was wandering if someone who is not as financially compromised as me (like dad for example) be able to get a better deal on a personal loan? He could take it out in his name and then my monthly payments go to him/his loan. (Not that i have asked whether dad would be willing to do this!)

3. Or is the best option simply paying off the overdrafts themselves. I get confused with the interest charges here - If i threw £110pcm at the overdrafts, How much would i pay in total before they are cleared? i know that when each overdraft is maxed out at £2,000 the interest is approximately £30PCM, but my simple brain can’t work out what the difference would be between paying of the overdrafts with £110pcm or paying of a £4,000 personal loan at £110pcm over five years.

a final note - my credit rating is screwed and last time i checked no one would give me an interest free credit card for balance transfers etc.

Any and all advice appreciated:j

DVardysShadow

1 is not recommended. It does not make your debt go away. It just moves it somewhere else and you still have to pay it off. The other thing is if you lose your income you are on a treadmill of having to meet the repayments every month.

2 Anyone who takes out a loan for someone else is a fool. If we had a pound for every time someone comes on here with a problem where their credit has been trashed by a loan, phone or catalogue account taken out for another person with lousy credit, we would probably be able to set a couple of people debt free. Don't even think of getting someone else to take a loan in your name unless you have no dignity.

3 is the obvious way to do it. The snowball calculator http://makesenseofcards.com/snowcalc.html is the tool to do the calcs.

Annisele

There's a loan repayment calculator here.

It sounds as though the interest rate on your overdrafts is 18% or so - which would make option 3 slightly better than option 1.

As DVS says, option 2 isn't really an option. Yes, you will be getting "screwed" on the interest rate - in the sense that somebody with a decent credit rating would indeed get a better rate than you will - but the lender prices the risk that you'll default into the interest rate they charge. If you get your Dad involved, then he'll be the one carrying the risk you'll stop paying; and that's not fair to him.

Madone13

The other advantage of option 3 is that you can make overpayments easily and without being penalized. If you could afford to pay a little more than £110 a month you'll be able to clear the balances a lot quicker and so save more in the long run.

Mikeone

There is a cheaper way of doing 1) without taking on any additional credit:

1) Open a new current account with a different bank (make sure it is a totally different institution) and use that as your main current account.

2) Get your salary paid into this new account and transfer all regular payments so that they come out of it.

3) Cut up all debit cards/chequebooks etc from the OD account, so you can't spend any money from it. *VERY IMPORTANT*

4) Set up a monthly standing order to pay off what you can afford. As long as this amount exceeds the cost of any interest or charges, the OD will start to shrink.

It is then to all intents and purposes a loan to which you are making regular repayments. You'll continue to receive statements on it so you can watch it decrease month by month. That way, you get your desired manageable monthly payment without having to take on an expensive loan.

bellz

I would keep decreasing your overdrafts by say £500 chunks, if you don't have it you can't spend it simples!

StressedSteph

Mikeone wrote: »

There is a cheaper way of doing 1) without taking on any additional credit:

1) Open a new current account with a different bank (make sure it is a totally different institution) and use that as your main current account.

2) Get your salary paid into this new account and transfer all regular payments so that they come out of it.

3) Cut up all debit cards/chequebooks etc from the OD account, so you can't spend any money from it. *VERY IMPORTANT*

4) Set up a monthly standing order to pay off what you can afford. As long as this amount exceeds the cost of any interest or charges, the OD will start to shrink.

It is then to all intents and purposes a loan to which you are making regular repayments. You'll continue to receive statements on it so you can watch it decrease month by month. That way, you get your desired manageable monthly payment without having to take on an expensive loan.

I too have a big overdraft and Milkones idea sounds really good. One thing I would worry about though, is if the original bank with the overdraft sees that the regular wage isnt being paid into the bank they may withdraw the overdraft and request immediate payback. :eek:

Would it not be a better idea, to still open a new bank account, move all your direct debits etc to the new bank, but to still have your wages paid into the old one, and just transfer exactly the correct amount each week/month to the new account to pay your bills, leaving any left over to start reducing the overdraft on the old account.

Guess a very important part of this though it to make sure you can afford to do this and not start going over drawn on your new account and ending up with yet another overdraft.

Something that I am going to have a think about, as we are forever living in our overdraft and treating it like it is money we are able to spend when it most definately isnt :mad:

Interesting thread xx

StressedSteph

bellz wrote: »

I would keep decreasing your overdrafts by say £500 chunks, if you don't have it you can't spend it simples!

I tried this ages ago and with Barclays they wont do it over the counter, you have to meet with the Bank Manager and the man is a slimey toad and talked me out of it, saying that if I reduce the overdraft I may never get that amount ever again and its best to keep it :mad:. Of course its best, if you are good with money, but we most certainly are not. I will not take no for an answer next time .

He also gets me cornered for ages trying to sell me upgrades to my account for high monthly fees, life insurance etc etc etc. Wish reducing your overdraft could be done online to avoid having to sit for an hour with the horrible man.

patman99

OP, think about it. If you take the loan, then the interest is over the whole term. Whilst if you transfer £110 into your overdrafts then the amount they calculate interest on reduces, as does the interest itself along with any interest charges.

By paying all £110 into your 2 overdrafts, you will save £0.60 in interest. This means that your next £110 will be worth a theoretical £110.60 off the o/d.

Mikeone

StressedSteph wrote: »

I too have a big overdraft and Milkones idea sounds really good. One thing I would worry about though, is if the original bank with the overdraft sees that the regular wage isnt being paid into the bank they may withdraw the overdraft and request immediate payback. :eek:

That's a very good point, and certainly plausible. My OH has a sizeable OD with Lloyds, who are not known for being the most cuddly of banks, and she is currently using this method to reduce the OD. She moved her salary and DDs etc to the Co-op some time ago without any problems from Lloyds. They're still making money from the outstanding funds, but is is shrinking bit by bit.

Of course, this might not hold in every case, so StressedSteph, your idea could be a helpful approach. Overall, I think the key is to obtain control of your day-to-day banking, and this can be very difficult in OD. I speak from personal experience.

Thanks Steph, and good luck to the OP!