To save and pay off or refinance and pay more monthly

hjscores

Hi

I have a loan at the moment, £22k or so, I have a very low interest rate (think it's about 6%), the term is for 7 years and the repayments are £375 a month.

I have just got a new job and will be able to save around £700 a month (if I don't spend it!). I really want the loan gone and soon so that I can be free of it. I am considering refinancing my loan so that the term is reduced down to 2 years maybe and then just paying more a month.

Is it wiser to save up privately and for some time to then be able to pay off a lump sum and continue with the small repayments or should I refinance it and except i'll pay all of the interest but have the loan gone in 2 years or so?

Any advice on this would be great! The other option I thought of was to use the money that I save (after a period of time) for a deposit on a buy to let property and have the income from the rent to help bump up my savings so that I save quicker to pay it off.

Let me know what you think, thanks in advance!

Pixie5740

What about making overpayments of £700 a month to the loan? That would reduce the term.

hjscores

I didn't know I could do that? I thought there was a penalty for any other payment but I will have a look at that and see if they will let me.

KRB2725

When did you take out the loan? If it was after 01/02/11, you can make overpayments of up to £8000 per 12 months period without penalty. After that, they are allowed to charge a fee, but it is still tiny in comparison to the interest charged.

hjscores

I have had the loan for a long time but I refinanced it in 2014 so maybe that acts as a new loan. I know that I can pay lump sum repayments off it but I've just called RBS and they've said that if I pay £700 overpayment on a regular basis then they will charge me 56 days interest of whatever the extra is that i'm paying off. That sounds like a lot, maybe that's on an annual basis she didn't say.


They've said it would be better to save up separately and pay off as a lump sum but I guess they would say that!

Herzlos

You'll still save a lot of money paying 56 days on each overpayment. You'd need to check the terms, as they may only let you overpay by 10% a year.

hjscores

Yeh I will you're right, I've just spoken to the bank again and they've said that if I make an overpayment of £700 then the interest charged would be £7 but the rest of the money would go straight off the loan which is brilliant.


I will check the contract wording with regards to how much i'm allowed to pay back because you might be right with regards to paying off a certain amount in a year.