Am I being silly not using savings to pay off debt?

chris024

So I have:

Car Loan - £5,468.70 (orig £7.5k) £133.01 per month 2.5% APR. Last payment Feb 2022

Credit Card - £1,859.86. 0% till Aug 2020. Making min payment per month of 2.25%

I tended to do most of my spending on a cashback credit card and at the end of the month pay off the whole balance or a significant chunk.

However the last 6 months I haven’t been able to pay it back in full and the balance has been slowly creeping up.
I know this debt is quite small compared to some but it is starting to worry me.

I have since stopped using the CC for spending, have transferred the balance onto a zero card and opened up an account with Starling to help budget my disposable income.

My finances are a bit backwards…I have 9.5k in a stocks and shares ISA (contributing monthly for 5 years) but only about £500 in emergency savings.

I want to build up my emergency/general savings outside the ISA whilst also not overspending and pay back the debt.

I live at home and have a good disposable income.

I could do a few things:

Use the ISA to completely pay off my debts.
Start making overpayments on the loan or credit card
Or save as much as I can in regular savers and make lump sum payments every now and again to clear off the debts.

Sorry if my dilemma is trivial on here. But any advice would be appreciated.

Many thanks.

Willing2Learn

Hi,

If it were me, I would apply for a money transfer card at 0% to pay off the loan early. (That is assuming the financial penalty for paying early isn't too high).

I'd continue paying the existing credit card minimum payments until August 2020 when I would pay the balance in full. That way I'd be earning interest at 5% (Regular Saver Account) whilst borrowing at 0%.

pjcox2005

I!!!8217;d save in regular saver and pay off card at end of interest free period, but you do need to understand why it!!!8217;s creeping up. Fine if conscious decision, not fine if it!!!8217;s a case of living beyond your means and failing to budget

Chandelier.

Hi,

I think you have a few options on here on what you could possibly do. I have listed a few.

First, you could see whether you are eligible for any 0% money transfer cards and try to transfer either all of the loan or as much as possible onto this. You could then set up a minimum or just above the minimum direct debit, but ensure you save enough money each month into a high interest current account, so by the end of the term you have enough in savings to pay off the full balance. Whilst also doing this for the current 0% card. The idea being you save as much interest as possible on your balances whilst also taking advantage of the high interest current accounts.

Second, you could pay the minimum or a set amount each month towards your 0% card. You may choose to work out how long is left against the total balance and pay a set figure so it is paid by the end of the offer. You could then make overpayments on the loan and lump sums where possible.

Third, you could use some of your savings to pay off your debt but if you were to do this I would pay it off the loan and let the 0% run its course whilst paying minimum/set amount. An example could be use a third of your current savings to overpay on the loan and then whilst making the repayments on your debt, open up a 5% current saver account and pay the maximum in over 12 months and you will then have built up what you have used to pay off your current debt.

There are many solutions to this but ultimately it is up to you. You seem to have managed to get low rate offers which is good. If you work out a good budget, I am sure you will be able to tackle this head on or figure a way that suits you whilst also saving. I will share my example.

When I had debt, it came in the form of a 3% loan to pay off my car. I made massive overpayments for a while and challenged myself each month to how much I paid off. I budgeted well and made huge indents. I then decided to take out some money transfer cards and was able to transfer the whole balances onto these. I then tackled these head on and was able to pay them all off whilst also still saving.

It is different for everybody but you need to find a way that suits you.

chelseablue

I was in a similar situation to you
I owed money to 2 cards and a car loan.

I applied for a new card with Virgin that is 0% on both balance transfers and money transfers for 30 months.

I applied for a money transfer and paid off the loan, then did a balance transfer from my other 2 cards.

Didn't get quite a big enough limit to transfer all of it but almost.

I've set the direct debit to £370 a month, this will clear it in 28 months.

I've got a S&S ISA with £6,000 in plus £2,200 in a savings account

madvicker

If your 9.5k is in a Stocks and Shares ISA, what has been your annualised return over the last 5 years? If it has been greater than 2.5% (the cost of your loan) then it makes no sense to pay off the debt. Carry on saving into the S&S ISA.

If you find your return has been less than 2.5% per annum, then yes, pay off the debt.

chris024

Thank you all for your input. It has helped a lot

I didn’t even think of doing a 0% money transfer for the loan.

I am pleased with my car, but kinda wished I had gone for a lower spec and saved a couple of grand. I hate seeing that loan balance every time I log into my internet banking.

Think I will continue paying the min amount on the credit card and throw as much as I can into regular savers. I have a 5% Nationwide and First Direct that I can use.

Will then pay the CC off at some point. At least half of the balance is down to expenses not budgeted for properly (car insurance & holiday)

For the loan, I will look at money transferring. I just need to make sure that I will pay it off within the given time frame.

I have taken the credit cards off my Apple Pay, have vowed not to use them and will start setting aside money for planned expenses. All good in theory I just need to stick to it!

S&S ISA has made 31% to date.

madvicker

chris024 wrote: »

S&S ISA has made 31% to date.

So your annualised return over 5 years is 5.5%. In this case, do not use any of it to pay off the loan. You would be cutting off your nose to spite your face....

There's some great advice here on other ways to pay it off, if your budgeting and financial management is on point, I would repay your debts at the minimum level for as long as 0% deals are active. Once they expire, and you cannot secure further 0% deals (or if you run into financial difficulty) only then should you pay off your debts with savings.

chris024

Ok. So done a bit of spreadsheeting this afternoon.

I have applied and been accepted for an MBNA 28 month 0% money transfer card for the loan (3% fee)
Thankfully they have given me a credit limit that will cover all of the loan.

I will make the min repayments on both cards by DD (average of £81 pm over the terms of the 0% offers)

I will then use my First Direct regular saver solely for making additional payments. Might even re-name the account if I can.

I would like enough money to clear both balances at the end of the 0% terms if necessary.
To do this I have worked out I will need to save about £216 pm in there.
I lose out on the interest if I make withdrawals.. so that should be enough of an incentive to not touch the cash.

I will use my Nationwide regular & loyalty saver for any other saving.

At least I have a plan now! feel better about getting rid.

enthusiasticsaver

Sounds like a good plan. I would not draw the money out of your s and s isa as it appears to be doing ok. I might stop or suspend the monthly payments though until you have got rid of the debt.

Rufman98

Hi,

I would do (am doing ) what willing2learn suggests.

The only caveat I put on it is you'd need a stonking credit limit on a new card to do a single money transfer; as suggested by others you might need more than 1 card. Clear the loan, wipe the existing cc with interest and spread your disposable income across savings with a little in premium bonds for the monthly flutter, then clear the remainder when your 0% runs out. May take a few years but hey ho, you hopefully have options to do it as cheaply as possible.

After that it's save all the way. If you can leave your ISA in tact that's no bad thing. I'm doing / have done exactly the same, with the exception of clearing a loan and paying some cc debt off with savings. The remainder is 0% on 2 CCS I never even activated and will cancel when cleared. My mortgage is only 10k now and I'll overpay on it for 10 months to clear it dec19, 14 months early.

The rest of an old cashed in pension and savings is mostly in premium bonds a) cause I'm quite lucky and b) it's a relatively guilt free gamble that could pay hugely any given month

GL