Loan or snowballing?

jambino

I think I know the answer but just want to run it by anyway.

I have £11,768.78 on three credit cards. They have been accrued over a number of years and don’t appear to be getting any closer to being paid off.

Barclaycard - £3,500.17 at 5.9% APR for the life of the balance which interest working out at about £20.00 interest per month.
Nat West - £6,915.23 at 27.9% APR standard rate following expiry of 0% period working out at about £75.00 interest per month.
MBNA - £1,353.38 which is 0% APR until December 2015 when it will revert to 24.9% APR.

My personal circumstances have changed and I am able to pay off £400.00 per month.

I know the usual advice is avoid a loan to pay off credit cards but having done some calculations I am thinking a loan will work out cheaper than snowballing.

Loan of £12,000.00 at 3.7% is £352.00 per months for 36 months. At 4.9% it is £359 per month and at 5.9% it is £364.00 per month. The interest on these three options is £696.00, £928.00 and £1,122.00 respectively.

If I was to snowball paying the highest interest first it would take 41 months to clear and incur interest of £4,495.00 over the period.

I do have an offer of a balance transfer to the Barclaycard at 0% for 10 months or 6.9% for the lifetime, both with fees of 2.9%. If I transferred the Nat West and MBNA (£8,268.61) it would incur a fee of £239.79 and take the balance to £12,008.57. Paying £400 per month it would take 33 months to clear and incur interest of £1,322.00.

I am right in thinking that the loan option will be cheaper overall and beneficial with personal loans allowing overpayments which may be an option in the future?

I have a good credit history and an excellent score according to an Experian trial membership (I know they aren’t always reliable).

All suggestions/comment welcome. Thanks in advance.

rockm87

Hi and welcome.

I wouldnt agree with paying debt with debt, it never ends well, and you just end up where you started regardless of how good the numbers may look.

I would put together a propoer budget and make sure you have cut down on everything you can to see how much you can really throw at the debt. You need to work out how you got into this mess in the first place, if you dont adjust your lifestyle to live within your means you will be no better off.....if you see what I mean?!

You need to cut up your cards, and work your socks off to pay them off. I would pay off the balances, smallest to largest first. YES I KNOW THIS IS CONTROVERSIAL AND OTHERS WILL BEAT ME OVER THE HEAD WITH IT, BUT THIS ADVICE WORKED FOR ME!

haha sorry, ive been told off on here about suggesting such things, but it worked for me.

Hope this helps!

submarine76

I have to say I agree with rockm87, both about not paying off debt with debt and paying off the smallest balance first. I think it's better for motivation when you can see the snowballing effect working for you faster, even though it may not appear best on paper.

Mulder00

You seem to have worked it all out - I would go with the option of paying the least amount of interest possible. (I didn't check your actual calculations, but if they are right, then you have your answer).

I definitely would NOT follow the advice of paying off the smallest balances first, since this will be in reverse order of how much interest you would pay. It would simply cause you to pay much more interest than you need to and there is nothing motivating about a large card balance growing ever larger every month.

A loan is sensible if you are on a fairly restrictive budget and cannot easily pay it off and restrict your use of credit cards. Even with loans allowing overpayments, it's never as easy as overpaying a credit card, so you need to consider this too.

redpete

rockm87 wrote: »

You need to cut up your cards, and work your socks off to pay them off. I would pay off the balances, smallest to largest first. YES I KNOW THIS IS CONTROVERSIAL AND OTHERS WILL BEAT ME OVER THE HEAD WITH IT, BUT THIS ADVICE WORKED FOR ME!

Whereas I would be motivated far more by knowing that if I paid off the debt that is charging the highest interest rate then I will be saving the most money.

Paying £100 off the Barclaycard will save £0.49 a month, £100 off the NatWest card will save £2.32.

£1000 off BC will save £59 a year, off NW will save £279 a year.

Getting a loan does seem to add up as beneficial - if you don't build up CC debt again once you've cleared it and especially if you overpay the loan to get rid of that ASAP.

Of course you might not get the best rate they advertise for the loan.

submarine76

Mulder00 wrote: »

I definitely would NOT follow the advice of paying off the smallest balances first, since this will be in reverse order of how much interest you would pay. It would simply cause you to pay much more interest than you need to and there is nothing motivating about a large card balance growing ever larger every month.

From next month the rate on the MNBA card is 24.9%. The balance on the large card will not grow larger all on it's own, just saying....

jambino

Thanks for the replies. All the cards are cut up in to tiny pieces. Had a change in circumstances and a clear lightbulb moment so motivated to sort this out.

I must admit that the loan seems the easier way out and would have lesser payments as well. I am going to run the calculations again to check they are correct.

Part of me likes the idea of the challenge of doing it myself but if it will cost more in payments and interest then the loan might be the best route. Could do the MSE challenges etc to go toward overpayments etc...

submarine76

Chopping the cards was the way ahead, most important thing to do is to stop the bleeding. You have obviously given it a lot of thought and should do what you think will work best for you, believe me the challenge can wear thin at times. MSE Challenges are a great way to help with overpayments, I find that the forum and diaries are a great way to keep myself motivated and on track, good luck on your journey, you can do this :O).

Playing_with_Fire_2

There are as many right ways to pay off debts as there are people. There are also some clearly wrong ways.

Anything that means you stay motivated, pay off the debt as quickly as you can and stop spending too much will work eventually

Some thoughts:
- don't get a loan because the payments will be less. You should be paying as much as you can afford towards the debt every month. It can be useful to have lower minimum payments; because it means that you can pay less towards the debt if a true emergency happens. You should aim to get a loan that it is easy to overpay and where they don't apply extra interest to overpayments.
- don't get a loan and then spend on the credit cards (sorted by cutting them up)

Getting a low interest loan and paying as much as you can looks like the best option mathematically for you. If you don't overpay the loan you can end up paying more interest than if you'd stuck with the credit cards. Other ways to motivate yourself include a wall chart with squares for each £10 of your debt, stickers and smiley faces.

[Deleted User]

jambino wrote: »

I must admit that the loan seems the easier way out

If you do go the way of the loan, do not, under any circumstances, let anyone talk you into refinancing the loan.

I fell for the "you can pay less per month" line, and lived to regret it.

and would have lesser payments as well.

Don't think "lesser payments". Think "over-payments".

Every penny you would've paid to the CCs (and preferably more), should go to the loan.