What order to clear debts?

bernice_31

I'm kinda stuck on what order to pay off the three debts I have:

Credit card - 0% for two years, £1,500 balance - paying £100 p/m
Home improvement loan - 0% £2,500 over 2 years - paying £125 p/m
Other loan - £10,000 over 5 years at 5.4% paying £189 p/m

The 'other loan' was for something that is going to cost a lot less now, so we will have about £8,000 left in the bank. Some of that is earmarked for other home improvements (small bits, like flooring or decorating) and I'm reluctant to use it all on debts as it is useful to have some cash in case the car blows up, etc.

Part of me would use the funds to pay off the smaller debts and use the £225 p/m to pay towards the bigger loan to get rid of it quicker, but I thought you were supposed to pay off the highest interest rate first?

We can just about cover all the payments atm, but I would like to reduce the number of payments and get rid of the debt quicker if possible.

Suggestions?

angelpye

The snowball calculator is a good place to start if you want to know quickest and cheapest route. Some like to pay off a smaller debt first to have the psychological achievement effect. HTH

LabRatty

Hi,
Your 'other loan' is costing you 5.4% to have 80% of it sitting doing nothing, while the rest of the debt is at 0%. Unless you can get more than 5.4% in interest while it's in the bank, you are in effect paying a significant amount to borrow an overlarge emergency fund.

Are you able to repay/overpay the loan early with no penalty? If so, do. If not, consider paying the minimum on the 0% cards and using the rest to get shot of the loan. Then use the £189 pcm freed up to save an emergency fund which doesn't cost you.
If you don't manage to clear all the 0% debt during the existing terms, focus on clearing the smaller one and you'll likely get another 0% offer to extend the term on the rest if you need it.

All the best,
LR

redux

The £10,000 loan is costing £45 interest in the first month, about £500 in the first year, and £25 a month halfway through.

Pay most of it back, say £7500, and the rest would take a year at the same instalments, or maybe aim to spread it over a couple of years to start with, until you've built up confidence with a bit of a reserve fund.

But as per the above post, better is reduce payments to the 0% borrowing for the time being., to go faster on the interest bearing loan.

National_Debtline

Hi

I agree that focussing on repaying the loan with interest makes the most financial sense.

As angelpye says though, some people find it effective to clear the smaller debts first as it helps them to keep going with the repayment plan. That’s going to depend on how you view things personally.

James
@natdebtline

zippygeorgeandben

Are you overpaying the first CC? A £1500 balance doesn't need £100 per month thrown at it. £62.50 per month would clear this within the 2 year period. You can then throw the remaining £37.50 at the loan with the biggest APR%.
I also get the fact that paying off a debt gives you a sense of achievement. Problem would be though that you then feel you have 'spare' money and might be less inclined to pay off the 'other loan'