Considering a consolidation loan

Astraeus

Folks

The position is thus - I have three credit cards with a combined debt of £5,750 in addition to an overdraft of £1,000. It is all servicable however I am tired of living in it and it is costing me £95 per month to keep up all four forms of borrowing. Having budgeted out the next 6 months, I am confident my disposable income will allow me to repay £4,200 of the debt. I will easily be able to clear it within 12 months, however it will cost me almost £1,000 in interest during that period.

I have looked at the Clydesdale/Yorkshire Bank loans and borrowing £5,000 over 12 months and repaying at £430 per month (easily affordable) would mean I spent only £154 over those twelve months in interest payments.

It is a risk going for the loan as I have a marked credit file from a missed CC payment 4 months ago, 11 months ago and another one from 26 months ago. Am I missing something or is this loan the way to go to clear my debts in the least expensive manner possible?

Many thanks.

Fmess

Hi

If you are able to get a loan and are determined to pay it off and the repayments will not stretch you too far, then yes it looks like the least expensive way to clear your debts.

I got a consolidation loan this time last year and then because unforeseen large costs came up, I had to put said items on my credit card and then I have struggled to make the loan repayment, as well as the credit card repayment. Plus I have been paying interest on the both as I cannot afford to pay the loan and make larger payments on the credit card I am not sure I would have been in a better situation if I hadn't done the consolidation, but at least I could have paid off the higher interest rate cards first.

Good luck

FireWyrm

I'm sure you've heard the warnings. Consolidation loans rarely work out as you hope unless you have very strong contingency plans for situations where you might need money. As Fmess says, you get the loan, but you end up using the CC which means you now have double the trouble to deal with. It will take some kind of serious willpower to make this work and I strongly suggest that you review your 'budget' with a fine tooth comb to ensure you can stick to this plan. Have you plugged your figures in to the likes of 'YNAB' (you need a budget') or are you just sticking a finger in the air and declaring that 'it is well within my budget'. Have you truly addressed the issues that led you to overspend in the first place and made plans to ensure that it never happens again? Can you guarantee, beyond all doubt, that you will never again spend on those credit cards or otherwise draw on those lines of credit? If the answer is no, then you have some very serious problems stored up ahead of you.

Astraeus

Fmess wrote: »

I got a consolidation loan this time last year and then because unforeseen large costs came up, I had to put said items on my credit card...

FireWyrm wrote: »

I'm sure you've heard the warnings. Consolidation loans rarely work out as you hope unless you have very strong contingency plans for situations where you might need money. As Fmess says, you get the loan, but you end up using the CC which means you now have double the trouble to deal with. It will take some kind of serious willpower to make this work and I strongly suggest that you review your 'budget' with a fine tooth comb to ensure you can stick to this plan. Have you plugged your figures in to the likes of 'YNAB' (you need a budget') or are you just sticking a finger in the air and declaring that 'it is well within my budget'. Have you truly addressed the issues that led you to overspend in the first place and made plans to ensure that it never happens again? Can you guarantee, beyond all doubt, that you will never again spend on those credit cards or otherwise draw on those lines of credit? If the answer is no, then you have some very serious problems stored up ahead of you.

The credit card debt is historical with 18-month interest free periods having expired during the middle of 2013 during which time I have been paying them down from a top of £8,500. The credit cards will go out of circulation. Having just had a £2,000 chunk of two months' paychecks taken out for car repairs and still managing to set aside £300 per month for a savings account, I am confident I can afford to take the CCs out of circulation.

Having reconsidered my budgeting this morning, I actually think I'll withdraw my accumulated savings to pay down the CCs (it was put away to keep it out of reach, not to gain interest) and then endeavour to repay within 6 months as opposed to taking out a consolidation loan. Having reviewed previous interest sums I am confident I can bring the combined interest payable down to nearer £65 per month. All in all I get the impression that a loan is best avoided so, even if it costs me slightly more to repay credit cards, I ought to proceed that way?

Thank you for the input.

Butti

This is a good idea. Saving rates are rubbish at the moment and it invests you in a kick start.

redpete

Astraeus wrote: »

I have looked at the Clydesdale/Yorkshire Bank loans and borrowing £5,000 over 12 months and repaying at £430 per month (easily affordable) would mean I spent only £154 over those twelve months in interest payments.

Are you sure that you would get the interest rate you're expecting? The headline rate only has to be given to 51% of customers who take out a loan - you might be offered something significantly higher.

I actually think I'll withdraw my accumulated savings to pay down the CCs

Why would you keep savings if you are paying such high interest on debt? It is often recommended to keep some savings for emergencies but £2000 of car repairs sounds like an emergency to me.

FireWyrm

Astraeus wrote: »

The credit card debt is historical with 18-month interest free periods having expired during the middle of 2013 during which time I have been paying them down from a top of £8,500. The credit cards will go out of circulation. Having just had a £2,000 chunk of two months' paychecks taken out for car repairs and still managing to set aside £300 per month for a savings account, I am confident I can afford to take the CCs out of circulation.

Having reconsidered my budgeting this morning, I actually think I'll withdraw my accumulated savings to pay down the CCs (it was put away to keep it out of reach, not to gain interest) and then endeavour to repay within 6 months as opposed to taking out a consolidation loan. Having reviewed previous interest sums I am confident I can bring the combined interest payable down to nearer £65 per month. All in all I get the impression that a loan is best avoided so, even if it costs me slightly more to repay credit cards, I ought to proceed that way?

Thank you for the input.

I was trying to raise questions in your mind and play devils advocate, not preach. However, as a veteran of the 'consolidation loan' merry-go-round, I have some small experience in this matter so I thought I would offer it :-)

Consolidation loans are possible, but human nature being what it is, anyone entering into such a plan needs to know for sure that they have 'changed'. It is like expecting an alcoholic to work in a pub, it just doesnt work. Sadly, there are no quick fixes to debt and often the only answer is a long, painful road. The fact that you have decided against a consolidation loan and in fact plan to liquidate your savings instead is a very sensible and prudent step to take. I would simply caution that there is a such a thing as throwing too much at a debt. Many will tell you that savings while in debt makes no fiscal sense because of the woeful savings rates at the moment, but 'savings' can be for a variety of purposes and not necessarily simply to earn money. I have a number of savings accounts for medium and long term budgeting purposes, such as annual insurance, tax, school uniforms. I dont have an OMGWTF fund as such simply because I havnt had a chance to accrue one, but I do have sufficient money stashed that I could easily deal with a broken boiler last week. I think an emergency stash of £500 will cover most eventualities whilst you dig yourself out of this particular hole, but you really will need to assess a more robust long term budget plan to ensure there are no further 'unexpected' expenses requiring you to break out the plastic and end up right back where you started.

With regard to YNAB (you need a budget) and MoneyDashboard, I have found these to be incredibly useful. I had an excel spreadsheet which I believed to be accurate, but when I plugged all the figures into YNAB, it showed that the excel sheet was quite a bit further from reality than I had hoped. I practice an 'envelope' method of budgeting which means that as of mid-last year, there is very little that takes me by surprise these days. That isnt bragging, it is practical advice.