Many Debts or One Big One?

southerndave

Not sure if this is the right place, but I am musing over a course of action and appreciate some thoughts from a different perspective.

We have a mortgage with Virgin One and owe roughly 80,000 on a facility of 100,000. Currently our interest rate is 4%

We have no other debts apart from a loan and our car finance. I have been toying with the idea of paying off both these debts by using the facility available to us, in other words adding them to the mortgage and then concentrate on clearing the mortgage as soon as possible.

Our loan is with a balance of around £6k and an interest rate of 12.1%APR over 54 months remaining.

Our car has approximately £6.5k left on finance over the next 4 years. Interest is 3.56% during the term but 6.9% overall as there is a final payment at the end of the term or you can hand the car back or buy a new one with a garunteed P/EX price. It is unlikely we will buy another new car as the experience of this one and the one before have been 'not good', but that has nothing to do with finance.

Adding roughly £12.5k to our outstanding balance would obviously put us 'behind plan' on our mortgage repayments, but it is using the One Account as designed.

My thinking is although putting us backwards on the mortgage it clears two big debts and the car becomes our asset. The money spent servicing the two debts every month would remain in the account and thus reduce our mortgage balance by that figure, so in essence our finances are not improved in the short term, but over the next five years should see a saving of the interest payments on both debts, or more accurately a lowering of the interest from 12.1% on one and 6.9% on the other to the mortgaged rate of 4%, assuming no increase in the next five years.

I realise this is an 'eggs-in-one-basket' idea, but was trying to work out the cheapest way of paying all three of these debts off as quickly as possible.

Any thoughts? Missed something? Worth doing? Pitfalls?

gallygirl

Assuming you are as sensible as you seem to be that makes perfect sense (on the loan at least, I dk how these car thingies really work). The caveat is - will you leave the money in the bank each month? Will you not be tempted to splash out with the 'spare cash'?

southerndave

Many would be surprised to hear me and sensible in the same sentence! :-)

Yes would definitely leave the money in there as we both HATE debts and have only accrued both the loan and the car out of some very bad luck with both cars and the house. As we have now resolved both those issues, and our finances are more settled having moved from self employment back to PAYE, we really want rid of them.

Any other thoughts?

bigadaj

If you are disciplined to pay it off then all looks fine. The one issue is that by doing this you are exchanging short term debt for long term debt, so if you pay the additional borrowing off over a mortgage term the amount of interest will be high.

UsernameAlreadyExists

This is entirely the right thing to be doing. Borrowing at your mortgage interest rate - which is lower (not sure about the car though, as I too don't understand that ... are there early payment penalties?)

Also, you're not falling behind as such ... because you're already behind ... because you have the debts - just elsewhere. Debt consolidation of this type is the best thing to do both now, and in the future. If you need to borrow more money, just use your mortgage and "fall behind" (if you see what I mean).

southerndave

Thanks for the replies and this is the kind of 'other thinking' I need so I don't make an error of judgement.

So, is there a simple way I can work this out with long term and short term debt? I am not brilliant at maths and percentages and the like.

Our mortgage term is due to complete in 2026, so 13 years from now. Currently we are trying to pay it off in 8 years for when I am 50. (see my Mortgage Free Wanabee thread).

I was thinking only in terms of getting rid of these debts, so if we did as I suggested and paid in the same amounts we currently use to service the debts, have I worked it our right that we'd pay them off in the same time scales they would have been anyway, but at a lesser rate of interest. IN other words am I exchanging short term debt for short term debt at lower rate, provided I stick to keeping the payment amounts in the One Account to reduce the higher balance quicker?

southerndave

Sorry Username, we posted at same time!

RE: the car. We bought a new car last year, trading in a three year old one. The balance of payment is a fixed monthly amount over five years. At the end of this period, we either pay a lumps sum and the car is ours, we trade it in against another new one (with a guaranteed value of this car against new), or hand the keys in and walk away car less!

The interest is stated as two figures, which after reading the verbose small print many times, I take to read as for the payments we are currently making, we are paying just over 3.5% interest which is cheaper than our mortgage. However, after the five year period we'd still owe the lump sum to keep the car, so if you assume this is taken into account with the finance as well, it would equate to 6.9% overall. Obviously if we traded in or walked away, we'd have paid 3.6% over the term but ended up with another debt or no car. As we want to keep this car and not buy another new one, we'd be paying a lump sum, so our interest equivalent is 6.9% over the five years.

I think!

UsernameAlreadyExists

southerndave wrote: »

So, is there a simple way I can work this out with long term and short term debt? I am not brilliant at maths and percentages and the like.

There's nothing to work out.
The money you would be paying to the loan/car remains in your account. so it's chewing away at the combined debt of the whole lots at 4%, rather than some at 4%, some at 12% and some at 6% ... see what I mean?

UsernameAlreadyExists

Haha, I too overlapped with you. You've got it

southerndave

LOL! Thanks. Should change yourname to quickdraw....!

southerndave

I forgot to add the only thing we have outside the mortgage is our furniture which is on interest free payment over two years. I assumed this would make sense to keep on a payment plan as although it is a debt technically it isn't costing us anything and would be accruing interest if added to the mortgage, correct?