Considering getting a Consolidation loan...

kolin_2

Hello,

I'm currently mulling over the idea of getting a consolidation loan to clear myself of my overdraft and 2 credit cards, but can't actually decide if I need to or not.

Heres some background
Overdraft : £1400 (£20/month servicing)
CC #1 (HSBC -limit 2000) : £1664 --> APR:24.9% --> Interest/Mth:~£35 --> Payments/Mth:£100
CC #2 (Natwest -limit 6500): £5600 --> APR:16.6% --> Interest/Mth:~£80 --> Payments/Mth:£200

The payments are the maximum I can make at the moment on each card. CC #2 was originally used as a 0% balances transfer, but I can no longer get a 0% card with that limit anymore, 1000 appears to be the limit that i am being quoted. so now the introductory rate has gone on it.

HSBC (with whom I am a current account holder) are doing an APR 3.9%(Repre) personal loan for current account holders where the loan is between 7K and 14K.

Using the calculator on here, CC1 will take me a 22mths to pay off at the current rate, and CC2 will take 36mths to pay off

The total of these debts to me per month is £320, If i were to get the advertised HSBC Personal loan rate(unlikely) over the following:
Currently paying : £320/mth
36mths : £267/mth(3.9%) or (~£280 at 11%)
48mths : £205/mth(3.9%) or (~£212 at 11%)

Doing this would mean I have no more overdraft (yay) and no more credit cards(yay).

I'm not looking for a definite answer, i'm just sat on the fence about whether I should get one. The OH says I should (or at least see what the rate is i'd get)

Also, we have just acquired ourselves a newborn and are trying to save for a [STRIKE]house[/STRIKE] deposit for a house. will the paying off of credit cards and having no overdraft impact positively, or would it be neglibable considering the debt will have trandferred to a single loan?

Thanks

also: I understand theres seperate forums for cards and loans, however i judged this to be the best place, as i want to be free of credit card/OD debt.

FireWyrm

As a general rule of thumb, consolidation loans are an extremely bad idea, they almost never work in practice. Having said that, if you CAN make them work, they can buy you breathing space. The problem is, most people simply run up the same lines of credit again that they just cleared via the consolidation loan and end up right back where they started, only worse off.

If you go down this line, you cannot, under any circumstances, ever again use a credit card. It's that simple. No matter how tempting, you cannot use that card because you will be back next year in a worse off position.

What works out best however is to find the root cause of your overspending and/or credit problems and fix that instead. Rearranging your finances to be more efficient, making economies and being frugal often work out much better than a consolidation loan in the long run. Why dont you post an SOA up here and we'll see what can be done with that first before you go off down the consolidation loan route.

[Deleted User]

kolin wrote: »

Using the calculator on here, CC1 will take me 22mths to pay off at the current rate, and CC2 will take 36mths to pay off

That's incorrect.

Snowballing the two debts, in the correct order, will have both CCs cleared in 27 months, for £1,333 interest.

Will the loan cost you more than £1,333 interest?

If yes, then stay were you are.

If it's a close run thing (ie. only a pound or 2 less per month), then ask yourself if you want to be paying for an extra 9, or indeed 21 months?

Kate_fixing_it

My first instinct is NOOOOOO!!!

You can't swing a cat on this forum for hitting someone that has fallen into this trap. The main reason (me included) is not treating the cause of the debt so the cycle continues. You celebrate the relief of being "out of debt" by (unintentionally) creating more.

Personally I'd try writing and sticking to an efficient and more frugal budget for a couple of months and see what effect it has. There are always savings to be made or annual expenses that get forgotten which can possibly teach you where the debt has come from. Once you understand this you can make your money work better for you and pay down the debt faster.

It's not impossible that a consolidation loan will help but it is imperative that you don't see it as paying off debt but transferring it. It's still there and still needs to be paid but you are doing it differently.

It's also worth noting what your income is in relation to your debt. You owe circa £9,000. When making a loan decision the bank will consider the loan amount on top of that. Every single person who takes a consolidation loan intends to pay off all debt but nobody can guarantee it and the bank will consider this risk when offering you an amount and an interest rate. So essentially they will be deciding how much of a risk you are to borrow £18,000 overall.
Kate x

FireWyrm

kolin wrote: »

HSBC (with whom I am a current account holder) are doing an APR 3.9%(Repre) personal loan for current account holders where the loan is between 7K and 14K.

That is the HEADLINE rate. I would be doubtful you would actually get that....work on the premise of 10% or more instead. At the moment, you are working out based on fantasy numbers that the bank will almost certainly not offer you. If you calculations at 10% show that you will in fact be paying more in interest on the 'consolidation' loan than you are currently doing...that's your answer.

My feeling is, you will find that the consolidation loan is nowhere near as attractive as you think it will be.

kolin_2

well you can view my story from 2011 here :

https://forums.moneysavingexpert.com/discussion/978733

Just to say, I know all about debts and paying them off, but if you are wanting a more up-to-date state of affairs, heres the breakdown

Income : ~£2100 after tax
Outgoings : (these are like second nature to me, as i make a point of recalculating them every month)
Car : £209.89/mth (paid off fully in 18mths time)
CC#1 : £100/mth (see OP)
CC#2 : £200/mth (see OP)
Bills : £587/mth (*1)
Food shopping : £200/mth (*1)
Fuel : £200/mth (*2)
Car Maintenance : £50/mth (*3)
Phone bill : £12/mth
Overdraft : £20/mth
Wedding : £70/mth(paid in 18mths)
Savings : £300/mth (*4)
Total : £1878
(I always tend to budget more than things actually cost, for example food budget in total is budgeted between us at £80/week, where we actually spend around £50-60/week - at aldi)
Notes
(*1) our bills are split as a percentage of what we earn, so because I earn more than the OH, I pay more. In particular, as she is on maternity leave, she is only on Half pay as well now.
Bills include : Rent, Council tax, gas and electric, tv license, water, broadband, and a Sofa. This is a fixed amount, so that surplus is there next year to pay more council tax/bills per/mth. (e.g. CT is currently 80/mth, we pay 110/mth, so we finish paying it early and hopefully next year we can pay a larger initial payment, and finish paying it even earlier.

(*2) fuel is always generous, I run a frugal 54mpg diesel. and generally put in more for fuel that i acutally use in a month.

(*3) this is a fund for all servicing, MOT, Tax, and Insurance. again so when they come around every year, i can pay for them outright.

(*4) savings for when OH Maternity is reduced to SMP and savings for house deposit (total between myself and OH is around £6K)
---

I am still very tight with money, and now believe I run a tight ship finances wise.

I am also fully aware that i would never get the 3.9% rate, hence me putting the 11% rate in next to it.

kolin_2

Bedsit_Bob wrote: »

That's incorrect.

Snowballing the two debts, in the correct order, will have both CCs cleared in 27 months, for £1,333 interest.

Will the loan cost you more than £1,333 interest?

If yes, then stay were you are.

If it's a close run thing (ie. only a pound or 2 less per month), then ask yourself if you want to be paying for an extra 9, or indeed 21 months?

This £1,664 debt will take 1 year and 9 months and cost £348 in interest.

This £5,600 debt will take 2 year and 11 months and cost £1388 in interest.

So the total is 1736 in total interest, however I assume by snowballing you mean paying of the 24.9% first, and then use what gets freed up to pay off the 16.6%?

bsms1147

kolin wrote: »

So the total is 1736 in total interest, however I assume by snowballing you mean paying of the 24.9% first, and then use what gets freed up to pay off the 16.6%?

That's correct.

For most people snowballing should be the way they go, rather than consolidation.

HappyMJ

kolin wrote: »

well you can view my story from 2011 here :

https://forums.moneysavingexpert.com/discussion/978733

Just to say, I know all about debts and paying them off, but if you are wanting a more up-to-date state of affairs, heres the breakdown

Income : ~£2100 after tax
Outgoings : (these are like second nature to me, as i make a point of recalculating them every month)
Car : £209.89/mth (paid off fully in 18mths time)
CC#1 : £100/mth (see OP)
CC#2 : £200/mth (see OP)
Bills : £587/mth (*1)
Food shopping : £200/mth (*1)
Fuel : £200/mth (*2)
Car Maintenance : £50/mth (*3)
Phone bill : £12/mth
Overdraft : £20/mth
Wedding : £70/mth(paid in 18mths)
Savings : £300/mth (*4)
Total : £1878
(I always tend to budget more than things actually cost, for example food budget in total is budgeted between us at £80/week, where we actually spend around £50-60/week - at aldi)
Notes
(*1) our bills are split as a percentage of what we earn, so because I earn more than the OH, I pay more. In particular, as she is on maternity leave, she is only on Half pay as well now.
Bills include : Rent, Council tax, gas and electric, tv license, water, broadband, and a Sofa. This is a fixed amount, so that surplus is there next year to pay more council tax/bills per/mth. (e.g. CT is currently 80/mth, we pay 110/mth, so we finish paying it early and hopefully next year we can pay a larger initial payment, and finish paying it even earlier.

(*2) fuel is always generous, I run a frugal 54mpg diesel. and generally put in more for fuel that i acutally use in a month.

(*3) this is a fund for all servicing, MOT, Tax, and Insurance. again so when they come around every year, i can pay for them outright.

(*4) savings for when OH Maternity is reduced to SMP and savings for house deposit (total between myself and OH is around £6K)
---

I am still very tight with money, and now believe I run a tight ship finances wise.

I am also fully aware that i would never get the 3.9% rate, hence me putting the 11% rate in next to it.

You have savings....use them and pay off the debt. There is no need to have savings when you have debt. Once the credit card is cleared you can use it again in an emergency.

Then save more in the future to replenish your savings pot.

Unfortunately I would not recommend a consolidation loan in your circumstances. You finances are too much on the edge to be able to comfortably handle the repayments which means you will be tempted to use the credit cards in the future to pay for something you feel is urgent and important. You even have a sofa on credit...

sourcrates

Consolidation loans are a complete car crash, I would say most people who take one out, to settle existing credit, end up taking that credit out again, long before the consolidation loan is settled, thus doubling there debt, and continuing the spiral.
For most people the temptation is just too great, and you will try to kid yourself you can manage it, and then 6-8 months down the line, your back on this forum asking for help again, as your debt has doubled, seen it, nicked,it, spent it !!!
In essence, a very bad idea, my advice, see where you can make savings in your budget, and throw all you can at the debts.

bsms1147

HappyMJ wrote: »

You have savings....use them and pay off the debt. There is no need to have savings when you have debt.

I'd agree with this. Having savings is costing you money.