Please criticise my consolidation loan plan!

Darkslider

Hi everyone, new to the site, the same as all of you I've decided to sign up as although my debts are manageable at the moment, I've worked out the amount I'm spending just on interest is sickening and I can see it getting worse in future if I don't put a stop to it now.


Thought I'd post up my 'possible' short term financial plan to try and sort out my debts so they're a bit more manageable and hopefully get everything down to a lower interest rate that I can then plough any spare cash I've got into in the future. I take home £1120 per month after tax, and all my borrowing is currently with Lloyds in a current account at -£1200 with a -£1600 overdraft, a credit card at £1700 with £2250 limit and a £5k personal loan which is down to £2164 with 14 payments left. Interest on the loan is at 12% and 19.9% on both the overdraft and credit card. Also an Argos store card with nothing on it and a monthly mobile contract.


I know consolidation loans aren't always recommended as there are so many stories of them being taken out and then the original OD and cards being run up again creating even more of a mess, however I'm really serious about sorting it out this time so I'm going to force myself to be disciplined. I was planning on reducing my CC and OD limit to about £300 on each one once they're cleared, so long as the bank play ball with that idea. Lloyds are currently offering good deals on loans as low as 6.4%, I'll be unlikely to get that rate with my credit rating at the moment but I've just been through everything and noticed I've got some cards at my parents address still and I wasn't on the electoral roll at my current address. In the process of sorting all that out today so I'm hoping it will improve in a month or two. As I've already had a personal loan at 12% with no trouble I'm hoping I'll be offered in the single figures for a consolidation loan, as well as Lloyds offering a further 1% off for current account holders of over five years which I qualify for.


So long story short assuming I can get a favourable rate on a loan my plan was to borrow £7.5k to get the best rate possible. I've worked out my current outgoings on minimum payments and interest over everything and if I were to clear it all it would leave me with £240 a month so I want to try to go for the shortest possible loan duration that will keep me under that repayment amount. I won't need the full £7.5k so I was going to open a savings account in my online banking, shift the excess £2.5k into that for a few weeks then use it to lower the loan to about £5k as Lloyds loans have no charges for overpayments. I'll use the same savings account to pay any extra cash I've got into and whenever it gets up to a decent chunk (£4-500 perhaps) I'll pay it off the loan and start again.


I know it's not an ideal scenario but having tried once last year for a 0% credit card with a different bank and getting not getting accepted I'm not sure that's going to be an option for me at present. Though I'm going to work hard over the next two months at getting my credit card down a bit while I wait for my address situation to have a (hopefully) positive effect on my credit status, so I could try again before I take the plunge on another loan.


Any feedback would be appreciated, I know it's difficult to comment without knowing the exact terms of whatever loan I'd get offered but I'm hoping the idea in principle isn't completely daft!

[Deleted User]

It looks as if your curent debt against income is probably too high for you to get a further loan, or one at a decent rate.

What's your total debt and gross income? (I'm feeling too lazy to do the calculations myself this morning.)

gb12345

With your current available credit, you are unlikely to be offered a further loan of £7,500 on your salary

Darkslider

Cheers for being honest guys! Annual salary before tax is £17.5k, total current debt is a touch over £5k, £5064 to be exact. I think you might be right, using the rule of thumb, assuming I told them I was going to consolidate my debt and then blew the £7.5k on something else I'd be in debt to the tune of £12564, which is obviously too close to my annual income for comfort!

I may have to put a few more months hard work in then and re-evaluate my position later in the year.

Or get a better job :P

Tixy

If all your debt is with lloyds and you want to apply for a new loan with lloyds then you may not have that as such a big problem as if you were trying to borrow elsewhere.

They will be able to force you to repay the existing debts (they'd likely automatically pay off the old loan straight away and may reduce or remove your overdraft facility and credit card facility).

They will still consider your ability to repay the debt of course and will likely look at whether your overdraft and card balances have been increasing or if they have been roughtly static or reducing.

Darkslider

Thanks Tixy. I'm not quite so sure on the idea of a loan now I think it would make sense to stay as I am for a couple of months to give my credit rating a chance to improve slightly then try for a 0% card to shift my credit card balance over to. However if, like you say Lloyds will give me a good rate on a consolidation loan as long as they take control of making sure it's used properly that could still be a worthwhile option.

longtermplanner

Getting a better job is a great plan

Don't apply for more than you need. The rates may be better "in theory" on 7.5k but you aren't going to be offered the top rates and are much more likely to be offered 5k than 7.5k.

Tixy

They might not give you a very good rate at Lloyds, just that they may consider a loan application where others won't.

But I definitely prefer your idea of working on reducing debts to start and then looking for a 0% card soon.

Ideally make sure you are paying at least a little more than the minimum on the card in the next few months, this can sometimes improve you chance of acceptance of a new credit card.

Pixie5740

Lots of great advice already and well done for tackling your debt before it really gets out of hand.

If you're not using the Argos store/credit card then close it. The credit limit available on that card will impact the amount of credit a lender will give you.

Darkslider

Pixie that's a good point I hadn't thought of that. There seems to be two schools of thought on unused credit, one says the lower you are in your available credit usage the better you look to companies, and the other says having huge availabilities of credit makes you unattractive to lenders as you could go out and rack it all up in one weekend/holiday/whatever. Is it definitely the latter that seems to be the most accepted?

I've been looking at other options as well and I notice my Lloyds Avios credit card has a 0% balance transfer deal, for 12 months with a 3% fee. Not much good to me at the moment as it's £1800 on its £2250 limit, but I had a question.

My mum being the perfect credit holder with no debt has 0% offers coming out of her ears and no balance to use on them. She says she'd be happy for me to transfer my balance to one of her cards which has a 0% for 18 months. I'm not sure of the transfer fee though.

Would it be cost effective to simply transfer the balance to her card for a few weeks then move it back to take advantage of Lloyds 0% offer? I'm aware I'd be paying the transfer fee twice, but if that is going to work out as substantially less than the interest I'd pay over the 12 months would it be worth doing?

Sorry for all the random questions as you may have gathered I'm somewhat of a financial retard whose just trying to explore his options!

Pixie5740

I think with availalbe credit lenders tend not to like it when people have maxed out their credit cards and so having some available balance on a card is a good thing. If you're not using a card I would just close it, that's what I did.

If you BT to your mum's card and then back to a card of your own then you're looking at about £108 in BT fees assuming each card issuer charges a 3% fee.

If you continue to pay interest on your £1800 card balance with an APR of 19.9% then your monthly interest will be less than £30. That's not taking into account any minimum monthly repaylemts you will need to make.