Which Debt to Pay Off First?

benefitboy

Hi,

I'm deliberating over which of my debts to clear off first and would like some kind advice on what may be the best option.

I have four debts;
Credit Card 1 - £2050 at 0% until 09/03/2019 - Currently paying £25/month
Credit Card 2 - £4240 at 0% until 08/06/2019 - Currently paying £110/month
Government Loan - £3100 at 0% For Lifetime of the Loan - Currently paying £65/month
Unsecured Loan - £7500 just borrowed at 10.5% for 60 Months - Scheduled to pay £159
So my total debt is £16890

I have just received a bonus at work of £5000 taking my total cash on hand to £11000. So my total net worth is still -£5890.

My current income is £2500/month and outgoings are around £1500, leaving me with £1000 to save/play with a month.

There is probably a straightforward answer to this, but which debt do I pay off first? I'm keen to clear the credit cards but since they are zero % it would seem daft to clear them before the new unsecured loan.

Please bear in mind I would like to try and keep £5000 cash in reserve for emergencies.

I think I've probably answered my own question but would like other insights before I make a decision.

anna_1977

If you don't mind me asking why did you borrow £7500 if you already had £6000 cash? £5000 emergencies is a LOT when you have debt

benefitboy

At the time I only had £5000 cash, I borrowed £7500 for two reasons.

1. I wanted to invest into a new business - £5000 - which I have now done.
2. I was intending on paying off credit card 1 as I thought this was out of its 0% period, it later transpired that it doesn't end until 2019. (I should have checked this first)
3. I always want to keep around £5000 in cash for emergencies.

benefitboy

I'm happy to realign my thinking on my reserve cash of £5000 - nothing is off the table and I welcome all suggestions on better money management.

EssexHebridean

benefitboy wrote: »

I'm happy to realign my thinking on my reserve cash of £5000 - nothing is off the table and I welcome all suggestions on better money management.

Generally speaking, we break requirements for emergency fund savings down a bit like this:

In an ideal world, if totally debt free, the perfect solution is to have 3 months complete outgoings at base level stashed away. In fact many people who ARE debt free and have also shifted their mortgages choose to enlarge on that.

Generally though, while you have debt, this:
Homeowner: £1000 - this will cover most "emergency" scenarios - so let's assume your washing machine, fridge freezer & cooker all go on the blink within a couple of months - you're covered without resorting to cards.
Renting UNFURNISHED - as above.
Renting furnished to a level that includes white goods: If you own a car then probably £500 is a sensible amount. If no car then personally I'd say for a basic emergency fund £300 is probably fine.

First up check the T's and C's on the loan - are you able to pay it off early without penalty? If you are I'd start by throwing 4k at that, then shift the remaining sum ASAP using your surplus. Bearing in mind you've only just taken it out, 4 months will probably shift it. You're right that there is no sense in clearing 0% cards while there is an interest-charging loan there though.
then you can turn your attention to the cards - with the existing surplus plus the loan payment - the first will be gone in less than 2 months, and the second in around 3 months after that.

It's then your call if you tackle the Government 0% loan or simply leave it to run it's course. If it were me I'd probably want it gone so I could consider myself owing nothing to anyone.

**edit** apologies - missed the bit about the bonus. So:
Clear all aside from the 0% Government loan using your savings and surplus to cover the shortfall. Replace savings with your nice chunky monthly surplus. job done. :cool:

anna_1977

I think if it were me I'd pay the £7500 off with savings and then you still have £3500 savings.... then spend the £1000 a month (or £500 & save £500) off on the CC's

Wookey

Clear the loan asap at 2k interest over 5 years that is a lot, i hope the business investment has a pay back greater than that.

Happier_Me

Hi

I would also pay off the loan and then work out how much per month you need to pay off the 0% cards to have the balance cleared before interest is incurred. Is this amount affordable? If so either pay this off the cards or save it and pay each card off as the introductory offer comes to an end.

It's been mentioned before but there may be a penalty for early repayment of the loan. Check this out. I have had a few loans in the past where the penalty has been say 90 days interest calculated on the balance remaining. I was able to make an overpayment without penalty to reduce the balance down to a small amount, then clear the remaining loan with a much smaller interest penalty. It's saved me a couple of hundred pounds each time so it's certainly worth asking. I even got the loan company to calculate the interest savong for me!

benefitboy

I called the bank and I was still within my early redemption period, so paid off the loan of £7500 today within incurring any fees or interest.

I've worked out what I need to pay back on each credit card monthly to clear them by the 0% promotion end date.

Thanks everyone for your help.