Best move to handle my debt?

MEM62

1) Set aside sufficient money to move from your savings. (Deposit, rent up front, agency costs etc)
2) Set aside an emergency fund - say £1000.
3) Use remaining savings to pay down as much of the loan as possible.
4) Divert money that was going into saving to overpay the loan.
5) When the loan is cleared move out and find a home with your partner.

AimHigh

Thank you everyone for your replies, the suggestions have been really helpful.

Just to add this to the mix: (I'm not ignoring your advice, I'm just evaluating my options..)

I was crunching the numbers between paying off my full loan right now, which will essentially wipe out my savings, and just overpaying my loan every month until it's gone.

I currently pay around £330 pcm for the loan with a term left of 38 months. If I was to overpay my loan by paying off £600 pcm then it would cut that term right down to 20 months (please correct me if I'm wrong!). The difference between this and paying off the full loan right now is that after the 20 month period I would have almost EXACTLY the same amount of money in savings, I would just have had to pay a total of £350 interest on the loan if I didn't pay it off now.

Now obviously the less interest I could pay, the better, but my current thought process is that moving out isn't going to be within the next few months. Ideally we will probably wait for my girlfriend to get her full time employment before we actually looked to start renting so that means I can't predict exactly how many months from now we'd want to actually get a place.

So I'm wondering if I could justify that £350 expense, for the sake of having the security of my savings if it suddenly gets to a point where we're ready to start renting or even put a deposit on a house?

The alternative is to do what a few of you guys have mentioned and take out enough from my savings that'll cover rent/emergency fund/furniture etc and then perhaps a little bit spare and then put the rest towards the loan and continue to overpay as that will bring down that £350 interest figure.

I appreciate that wasn't necessarily a question, it's more a case of me thinking out loud and hoping you can critique my thought process..

Please let me know if it didn't even make sense

enthusiasticsaver

Is there an early redemption charge on the loan and is it charging daily interest? That could have an impact on your calculations as far as I can see you have just multiplied the 330 per month by 38 and come up with £12540 then divided it by £600 to make 20 months. Paying off loans is not always exactly as you think and it depends on terms and conditions. Are you sure it is just £350 interest you are saving and would you save more if you paid a lump sum off now from your savings now?


I would not recommend using all your savings to pay off the loan and it is best to keep some back but if you are being charged daily interest I very much doubt you are earning more on your savings than you are being charged on your loan. How much are your savings in comparison to your loan and what are the rates of interest on both? Only then can we make informed calculations.

AimHigh

enthusiasticsaver wrote: »

Is there an early redemption charge on the loan and is it charging daily interest? That could have an impact on your calculations as far as I can see you have just multiplied the 330 per month by 38 and come up with £12540 then divided it by £600 to make 20 months. Paying off loans is not always exactly as you think and it depends on terms and conditions. Are you sure it is just £350 interest you are saving and would you save more if you paid a lump sum off now from your savings now?


I would not recommend using all your savings to pay off the loan and it is best to keep some back but if you are being charged daily interest I very much doubt you are earning more on your savings than you are being charged on your loan. How much are your savings in comparison to your loan and what are the rates of interest on both? Only then can we make informed calculations.

Hi,

There are no charges for overpayments but I'm not sure about an early redemption charge (have to check T&Cs) and I'm not charged daily interest I believe. The below is how I worked it all out and in typing it out I realised I actually mixed up a couple of numbers so have corrected.

So the official amount owed is around £11,840 (which would mean £309.52 at 0% interest) but my fixed monthly payment is £329.56 which I therefore equated to being £20.04 interest per month (£841.68 across the full 42 month term which correlates with the interest it told me I'd be charged at the beginning). Now the interest I get charged isn't actually £20.04 a month but is closer to £35-37 at the minute although it's decreasing each month so I assume they've just split that £841.68 across the full 42 month term as a % of the overall amount owed, ergo it decreases as the amount owed decreases rather than a specific £20.04 monthly interest charge? (EDIT : realise interest is obviously charged as a %, just explaining my calculations)

So that approx £350 interest saved figure comes from working out that if I paid off the full loan right now, it would save me £761.52 in interest (38 x £20.04) whereas if I overpaid for that 20 month term it would only save me £360.72 in interest (I accidentally wrote this down as the interest I'd have to pay over 20 months rather than the 18 months of interest I'd save) so I'd still have to pay £400.80 in total.

My savings are actually almost exactly the same as my debt, but as they're split across ISAs and regular savers (including the new Help to buy ISA) it means I'm making around £240 interest on my savings, which is the same as my debt interest charges? (12 x £20.04 = £240.48) This is assuming I've calculated it correctly, in reality it will be more than this for the first year and decrease across the next 2 so I'll actually be slightly worse off for the first year at least?

Am I doing something drastically wrong?

Annisele

AimHigh wrote: »

So the official amount owed is around £11,840 (which would mean £309.52 at 0% interest) but my fixed monthly payment is £329.56 which I therefore equated to being £20.04 interest per month (£841.68 across the full 42 month term which correlates with the interest it told me I'd be charged at the beginning). Now the interest I get charged isn't actually £20.04 a month but is closer to £35-37 at the minute although it's decreasing each month so I assume they've just split that £841.68 across the full 42 month term as a % of the overall amount owed, ergo it decreases as the amount owed decreases rather than a specific £20.04 monthly interest charge? (EDIT : realise interest is obviously charged as a %, just explaining my calculations)

That's not quite how it works. Your final payment will be almost entirely capital, with next to no interest. Your earlier payments will have way more interest in them.

My calculations might be a bit skew whiff, but I think your interest payment for this month will be more like £90, and your interest payment for month 41 will be more like £3. Interest definitely doesn't spread evenly over the term.

Looked at another way, if you owe £11,840, and there aren't any early repayment charges, then repaying in full now will cost you £11,840. If you keep paying £329.56 until the end of the term, you'll have paid £13,841.52 - which is almost exactly £2,000 more. So one question is - will you get £2000 interest on your savings in the next 42 months?

This calculator and this one might give you more of an idea (they're both in USD, but just pretend it's GBP - the maths is the same). I make the rate you're paying somewhere around 9.3% - which is OK for a loan, but way more than you're going to be getting on your savings.

AimHigh

Annisele wrote: »

That's not quite how it works. Your final payment will be almost entirely capital, with next to no interest. Your earlier payments will have way more interest in them.

My calculations might be a bit skew whiff, but I think your interest payment for this month will be more like £90, and your interest payment for month 41 will be more like £3. Interest definitely doesn't spread evenly over the term.

Looked at another way, if you owe £11,840, and there aren't any early repayment charges, then repaying in full now will cost you £11,840. If you keep paying £329.56 until the end of the term, you'll have paid £13,841.52 - which is almost exactly £2,000 more. So one question is - will you get £2000 interest on your savings in the next 42 months?

This calculator and might give you more of an idea (they're both in USD, but just pretend it's GBP - the maths is the same). I make the rate you're paying somewhere around 9.3% - which is OK for a loan, but way more than you're going to be getting on your savings.

Hi Annisele,

Thanks for your response.

However, this loan is at 3.6% APR so I'm not sure how you worked out that £90 interest or 9.3% interest rate?

My understanding is that 3.6% APR is a fixed rate and won't change throughout the term of my loan?

And whilst I agree that the interest charge will start higher and decrease (I used the £20.04 as an average), I can't quite see how you got as high as £90 considering the highest it's been is £39 and has only decreased since?

I also don't quite agree with your third paragraph. If I was to pay off the full loan now then it wouldn't cost me £11,840, it'll cost me £11,840 + the money I've already paid off i.e. £1320ish (4 x £329.56) which will mean it actually cost me £13160 whereas the full term will cost me that £13,841.52 figure making a total cost of £681.52 on top of that £160 I've already paid in interest (13k loan).

EDIT : I think perhaps you didn't fully read all of my essay in the original post (apologies!) which stated the APR and that I took it out in July 2015 so I can see that you calculated it as me having another 42 months to go

AimHigh

Having just checked my T&C's, I had completely forgotten that there is actually an early repayment charge of up to 58 days interest (maximum £100). So that actually means the difference in paying it off early or overpaying till it's gone is even smaller.