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Advice on how to best use 5k to reduce debt

Hi all,

I wanted to ask for some suggestions on what might be the most effective way to reduce my debt.

My current situation is:
  • Current Account = -£1950 (overdraft limit is £2000 and costs me about £30 a month in interest and fees)
  • Credit Card = £221
  • Loan = £8679 (18% APR, monthly payment = £231.24)

I am just about to get £5000 and I am wondering how best to improve my monthly finances?

I am thinking about paying £1000 off of my overdraft and then paying £4000 off of my loan. Then getting another loan of £4679 with a lower interest rate (tesco loan?) to pay off the remainder of my old loan to try and reduce my monthly payment of £231.24 to something closer to £100 a month.

My main goal is to have more money available each month so that I can afford to live slightly better, rather than paying off all my loan as fast possible.

Any suggestions? Is there a better way of approaching this?

Many thanks,

Dan

Comments

  • I personally would get rid of the overdraft. The banks can recall ODs at any time so with you up to the limit on that I think it would be a good idea to clear it. Then don't use it! Get rid of it and buidl up a buffer in your current account.
    Post an SOA (Statement of Affairs) with all your financial info as that will help to provide the best answers.
  • Tixy
    Tixy Posts: 31,455 Forumite
    I would probably start by checking out how overpayments are treated for the existing loan.
    Most lenders reduce the term but keep payments at the same level, some allow you to keep the term the same but reduce future payments.

    I'd look in to this because you may not get accepted for a new loan at a cheaper rate.

    What was the reasoning behind paying £1k off the overdraft? how much would that reduce monthly payments by?
    would you reduce the od limit to £1k after you paid it off (because if not and if you struggle financially month to month it could be very easy to end up running up that debt again).
    A smile enriches those who receive without making poorer those who give
    or "It costs nowt to be nice"
  • runforlife wrote: »
    I personally would get rid of the overdraft. The banks can recall ODs at any time so with you up to the limit on that I think it would be a good idea to clear it. Then don't use it! Get rid of it and buidl up a buffer in your current account.
    Post an SOA (Statement of Affairs) with all your financial info as that will help to provide the best answers.

    Hi runforlife, thanks for the speedy reply.

    My SOA is:

    Income: £1264 (after tax/ni etc)
    Outgoings:
    Loan repayment £231
    Rent and other commitments total £690
    Which leaves me about £300 a month which gets spent so quickly on food, travel and trying to have a life.

    Tixy, thank you for your reply.
    What was the reasoning behind paying £1k off the overdraft?
    My reasoning is probably not sound, it was mainly to try and develop a buffer/have some spending money temporarily but you are right, I can imagine I would quickly re-spend all my overdraft again.

    I will have to call my loan provider (lloyds tsb) to see if they will allow me to re-negotiate monthly payments, but I think I can only reduce the term by paying some of the balance off early.

    I really want to find a way that I can reduce my current loan monthly payment so I would have at least an extra £100 a month.
  • Hi Dankybett,

    Firstly, think positive... The £5k is going to clear half your debt - a huge help - so make the most of it!!

    I agree with Tixy... Start by finding out about the existing loan so you know what your options are.

    For me, personally, I would clear the OD and credit card (what's the interest rate?) so you're starting afresh with only your loan to deal with.
    (Already, you're £30 a month extra in your pocket rather than the bank's)

    I would then either pay the remainder off the loan, or put it in a dedicated pot (something like TSB Plus, which pays 5% on balances up to £2k) to overpay the loan each month - depending on what the loan provider allows you to do. The interest rate on the loan is crazy, so the quicker you can get it paid down, the better!!

    Most importantly, you need to look at how you could reduce your outgoings (food shopping, bills, entertainment etc) to live within your means - until you're doing that you will just accumulate more debt.

    There's loads of brilliant advice and support on here about reducing bills, thrifty food shopping etc. it might be a bit of effort to get started, but once you do, you'll be hooked and wonder why you didn't bite the bullet sooner!!

    Good luck!!

    Shoot x
    :T DEBT FREE AS OF APRIL 2013! :T
    "I am the master of my fate. I am the captain of my soul"
  • Sholly
    Sholly Posts: 269 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    dankybett wrote: »
    Hi all,

    I wanted to ask for some suggestions on what might be the most effective way to reduce my debt.

    My current situation is:

    • Current Account = -£1950 (overdraft limit is £2000 and costs me about £30 a month in interest and fees)
    • Credit Card = £221
    • Loan = £8679 (18% APR, monthly payment = £231.24)
    I am just about to get £5000 and I am wondering how best to improve my monthly finances?

    I am thinking about paying £1000 off of my overdraft and then paying £4000 off of my loan. Then getting another loan of £4679 with a lower interest rate (tesco loan?) to pay off the remainder of my old loan to try and reduce my monthly payment of £231.24 to something closer to £100 a month.

    My main goal is to have more money available each month so that I can afford to live slightly better, rather than paying off all my loan as fast possible.

    Any suggestions? Is there a better way of approaching this?

    Many thanks,

    Dan


    Hi Dan,

    How about putting all of your debt on a 0% credit card?

    E.g....

    Total debt = £10,850
    Minus the £5k = £5,850
    Example balance transfer credit card (money transferred to current account): 4% fee, 32 months (fee would be £234)

    £5,850 + £234 = £6,084 divided by 32 months = £190.13 per month

    It's more than the £100 that you wanted but all of your interest is charged when you get the card and you might get some interest back when you pay off your loan (check for any penalties for closing the account early though).

    Obviously you have to be strict with this and not spend on the credit card - at all. As well as paying the set amount every month so that you don't lose your 0% offer and pay it off by the end of the term. You also have to be pretty sure that you'll be given the card. I think there's a form on MSE somewhere that let's you know your chances of getting a card without affecting your credit rating.

    Pick what's best for you and what you think would be most manageable! Good luck!
  • Thanks for your suggestions Shootforthemoon and Sholly.

    I will call my bank tomorrow to find out if there is any negotiation to be had on the monthly loan payments if pay off some of the loan balance but I am not hopeful.

    I am really intrigued by your idea Sholly of getting a 0% interest credit card. It looks like from the credit checker thing on this website that I would get approved for the barclays 0% for 34 months, but I don't know if I can tell if they would give me £6084? And I am not sure if I can use the credit card balance transfer to pay off the remainder of my loan?

    Can I also say it has been such a comfort to get such practical suggestions from everyone. I was really worried my post would get shot down for some reason. Thank you all.
  • Sholly
    Sholly Posts: 269 Forumite
    Part of the Furniture 100 Posts Name Dropper Combo Breaker
    edited 11 September 2014 am30 8:51AM
    dankybett wrote: »
    Thanks for your suggestions Shootforthemoon and Sholly.

    I will call my bank tomorrow to find out if there is any negotiation to be had on the monthly loan payments if pay off some of the loan balance but I am not hopeful.

    I am really intrigued by your idea Sholly of getting a 0% interest credit card. It looks like from the credit checker thing on this website that I would get approved for the barclays 0% for 34 months, but I don't know if I can tell if they would give me £6084? And I am not sure if I can use the credit card balance transfer to pay off the remainder of my loan?

    Can I also say it has been such a comfort to get such practical suggestions from everyone. I was really worried my post would get shot down for some reason. Thank you all.

    Hi again Dan,

    If you get a credit card that transfers the cash to your current account, you can pay off your loan using that money. I did this with my car loan :) try calling the loan company and ask for a settlement figure

    As for how much you'll get, it's a bit of a guessing game, and a risk. If the checker says you'll get that much then it's likely but not definite. If you only get a proportion of the amount you want, either think of a plan B or pay the minimum on the 0% credit card and pay off the bit that you couldn't transfer then up the payments on the credit card (remaining balance divided by the number of months left on the 0% card = total to pay every month)

    Sholly
  • You could also contact your existing credit card provider and ask if they do 'low interest life of balance' transfers and if they can be used for loans.

    If so, you may be able to refinance the loan onto your card at a lower interest rate, so even if you don't get a full 0% deal, you may be able to reduce the interest at least.

    I'd agree with paying off the overdraft and card first though. Reduce the available overdraft to about £100 as well, to stop yourself running it back up again.
    Some days, it's just not worth chewing through the leather straps....
    LB moment - March 2006. DFD - 1 June 2012!!! DEBT FREE!



    May grocery challenge £45.61/£120
  • runforlife wrote: »
    I personally would get rid of the overdraft.

    I agree.

    Not only can it be recalled at any time, but it's costing you £360 pa.

    If £221 is the balance on the CC (as opposed to the monthly payment), I'd get rid of that too.

    Then, I'd put the remaining £2,800-ish, toward the loan, thereby reducing the repayment period by (at least) 12 months.
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