Paying off a fixed loan?

dougle12

Hi,

I would appreciate some advice please regarding paying off a fixed rate loan. This year I have been paying off credit cards etc, living carefully and now have saved almost enough to pay off the remainder of a fixed rate loan that I have.

By the end of next month I will have saved enough to pay off the remaining loan of around £2,100. However now that I have the savings in the bank I feel reluctant to part with them. Paying off the loan now will save me about £80-£100 in interest rebate but setting that aside I feel that either paying off the whole loan now or continuing to save and make monthly loan payments will leave me with the same amount of money at the end of the day.

If I continued to save at least I will always have the option of paying off the loan but at the same time building up some savings. Which would be the best option? It would tke another 19 months to pay off the loan which is on a rate of 6%.

Unfortunately I also have an overdraft of around the same amount as my monthly salary. I am living well within my salary but have been using the extra money to hit my debts and have alway planned to clear the overdraft last.

Thanks in advace for any advice.

Larumbelle

Check what the rate of your overdraft is. It wouldn't be at all surprising if you found you were paying more interest on the overdraft than on the loan :eek:. Pay off whichever is a higher interest rate, and if its the overdraft have it removed so you won't be tempted to run it up again.

It is nice to have savings, but only if you have no debt. The exception is if you can get a better rate from savings than you pay on your debt. The best rates are listed here: http://www.moneysavingexpert.com/savings/savings-accounts-best-interest

Either way, if you save £100 now it's not 'having the same amount of money at the end of the day' it's having £100 more than you would otherwise . It can be the first deposit when you start saving again!

Robflh

Hi dougle12

Contact the loan company and ask them for an early settlement figure. It will be less then £2,100.

Overdrafts can be a very cheap form of loan, so you may wish to sort that out at a slower rate.

If you pay off the loan, you not only save the interest on the loan but you will also be saving the money you have been saving each month to pay off the loan.

Put most of that money in to something like an ISA and in no time at all you will have that amount of money again and no loan. Get some independent advice first, as to where to put the money.

Personally, I would do as silvercharming has suggested and then once I am debt free I would put 80% of what I have left each month in an ISA and the rest in a high interest account.

Make sure you can get to the 20% anytime you need to. This would be your emergency fund. Anytime something goes faulty, TV car, washing machine and so on, you pay for it from your emergency fund. For a while there may not be enough money in the EF, in which case you can use a credit card to back up your EF.

Do not use the EF for anything else, like paying for a holiday. That should be done as part of your SOA.