To switch, or not to switch?

twistednail

Hi there

I have a friend who currently has a loan that by the end of her term will have cost her £11500. She has 40 months left at the moment and pays I think between £270-280 a month. APR is 7.9%. She has tried to get the 2.8% with Sainsburys but has been offered 7.2%. They want £302 a month over 36 months, which means paying it off sooner but paying out more each month.

My question is, if she is currently in a fair amount of debt with a small amount of income left after credit card and loan payments, rent etc and is regularly in her overdraft, is it better for her to stick with the what she is on at the moment (although paying a few hundred more in the long run, is less likely to run out of money by paying a lower amount each month)?

I guess once her credit rating has improved (she has just applied for a new loan, and a new credit card, plus switched bank) then she can try and switch to a better rate in future?

Thanks

Matt

GazNicki

If she is struggling already with repayments, then increasing the monthly outgoings is going to make things worse.

The few hundred in interest she will save over the term of the loan will be swallowed with even more overdraft costs and missed payment charges.

Your friend would be better off heading over to the DFW board for specific assistance in getting her finances in a more manageable state.

Also, reading between the lines, it appears that your friend is only 8 months into a 48 month loan, and already applying for another to clear the previous one is going to have a negative effect on her credit report.

Getting to grips with the issue really does start over on the DFW board rather than shifting debt from one provider to the next with higher monthly repayments.

twistednail

Thanks for your response.

I got her to switch bank account for the switching bonus, and also got her to apply for a new credit card so that she could do a 0% balance transfer of her existing ones (as she was paying interest on those). When we went into the bank they said that they thought her loan rate was really high and it might be worth shopping around, which is why I was trying to help her do that (seeing that there were 2.8% deals all over the shop). Because of her credit rating though she obviously isn't going to get those.

Thanks again.

Mobeer

If she can afford to pay £302/month, perhaps she can instead overpay her existing loan? This should save interest and allow her to revert back to her current 270-280/month payments if she needs to.

Money_Rollercoaster

Mobeer wrote: »

If she can afford to pay £302/month, perhaps she can instead overpay her existing loan? This should save interest and allow her to revert back to her current 270-280/month payments if she needs to.

This would be my suggestion too.


If you have the flexibility to overpay, then you can still get the benefit of saving on interest and loan term, without saddling yourself with a commitment to pay more every month.


I'm not convinced that settling a loan early is actually that big a deal in terms of your credit worthiness / report. I had a rate of 4.9% on my car loan from Sainsburys and settled that after scarcely 6 months to get their improved rate of 3.1% - I don't think it's made any difference at all to my credit records.