Taking out a personal loan to pay off debt

GingerFurball_2

When I logged onto my internet banking last night I noticed that in my offers there was a personal loan available.

Due to my job, I would be guaranteed a rate of 9.9% APR on a loan between £1,000 and £6,999.

Currently my position is that I owe £2,231.04 on a credit card at 24.95%, and £1,700 on an overdraft at an EAR of 18.9% - reasonably big numbers, but a glance at my signature shows the progress I've been able to make on those two debts this year.

Additionally, the loan would allow me to pay as much as I want as often as I want and with no penalties for early settlement - at the rate I'm going with the two debts just now, I could easily clear the loan by Christmas.

It all seems like a massive no-brainer. Am I missing something really obvious here or is getting the loan clearly the right thing to do? I appreciate the danger of borrowing more money to pay off debt, but the account that's overdrawn is an old student account that's just been sitting for years - I don't even have a debit card any more for that account, and the account would be getting closed as soon as I can clear the overdraft. Swapping £4,000 of debt at 24.95%/18.9% for £4,000 at 9.9% just seems like a really obvious thing to do.

So what am I missing?

National_Debtline

Hello there,

On the face of it, you're not missing anything. What is important is that you stick to the arrangement. Consolidating for some can be a slippery slope, as such you'll need to ensure that you stick to the repayment arrangement that you've already put in place - and from where I'm sitting it seems like you will.

Best wishes,

David @ NDL.

GingerFurball_2

National_Debtline wrote: »

Hello there,

On the face of it, you're not missing anything. What is important is that you stick to the arrangement. Consolidating for some can be a slippery slope, as such you'll need to ensure that you stick to the repayment arrangement that you've already put in place - and from where I'm sitting it seems like you will.

Best wishes,

David @ NDL.

Yeah, absolutely.

What I'm wondering, with the ability to overpay as much as I want, whether the prudent thing would be to take the loan out over the longest term possible to ensure that my payment is as little as possible, in the event that something unforseen happened financially.

matttye

My understanding is that a lot of loans are front-loaded with interest and, as such, overpaying won't save you any money.

Worth looking into this before you decide what to do.

Whilst the loan makes financial sense, personally I don't like the idea of taking out debt to pay off debt. It's not something I would do.

GingerFurball_2

matttye wrote: »

My understanding is that a lot of loans are front-loaded with interest and, as such, overpaying won't save you any money.

Worth looking into this before you decide what to do.

Whilst the loan makes financial sense, personally I don't like the idea of taking out debt to pay off debt. It's not something I would do.

That's the sort of thing I'm enquiring about.

If I pay off the loan over 12 months, it'll cost me £200 or thereabouts in interest. Whereas so far this year, I've spent about £200 on interest alone on my debts, as well as paying off £800 of the actual debts!

Pepperoni

Don't overpay on a loan. You are more than often better off saving the money to close the loan early (and the remaining interest you would have paid is deducted). Paying extra each month doesn't do as much with the money as it could.

getmore4less

Taking out a personal loan to pay off debt


YOU ARE NOT PAYING OF DEBTS

get that idea out of your head you are moving them

getmore4less

Overpaying for no/reduced cost must be an option under the consumer credit acts 2010.

edit, pretty sure front loading has been stopped since the 1974 act.

Many think it is front loaded because you pay more interest at the start because you owe more, this is not front loading just people not understanding how loans work.

AIUI the max penalty is 30days/1months interest for full redemption.

GingerFurball_2

getmore4less wrote: »

Taking out a personal loan to pay off debt


YOU ARE NOT PAYING OF DEBTS

get that idea out of your head you are moving them

I admit it was a poor choice of title. I'm still aware I have the same amount of debt just in a different form, as per the OP:

GingerFurball wrote: »

Swapping £4,000 of debt at 24.95%/18.9% for £4,000 at 9.9% just seems like a really obvious thing to do.

Mattygroves2

If you do this don't take the loan over a long period. If the loan is over 12 months then you know it will be paid off at the end of that period without you having to make the decision to overpay and your interest is fixed.

If you take it over 5 years then you have to make the decision each month to overpay and it will be easier to spend the extra cash rather than overpay the loan. You could end up paying more interest than even the credit card that way.

thecassman86

The majority of this forum will massively disagree with consolidation and rightly so in many cases.

That being said, it is something that i have personally done and as it was after my LBM i've no intention of running up debts again. That's the risk here - that you all of a sudden have empty credit cards to spend on again! If you're committed and you're disciplined then, with those figures, it's definitely a viable option - even though a lot of people will argue it here.

Definitely try and get the loan paid off early though; the idea of paying off any debt is to limit the interest paid so that's definitely what should be done (but it seems you know that anyway).