What should I pay off first?

wordswords

I have a bonus of about £3000 arriving from work this month. I want to use it to pay off debt. I have three possible pools of debt to pay off:


* 2x current accounts maxed out on their overdraft, total sum ~£3000, costs £60 / month in total in arrangement fees
* A personal loan with a settlement figure of £5000, costs £160 a month in repayments
* Or I could use it to build up an emergency fund (which I know MSE doesn't recommend)



I was originally planning to put the debt repayment against the personal loan, but that won't affect my current monthly outgoings as it will just reduce the length of the number of payments of the loan.


Thoughts?

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JayRitchie

What is the interest rate on the loan?

[Deleted User]

Normally, you would pay off the highest rate debt, but overdrafts can be called in at any time, which could make life more difficult.

Compare the rates as a starting point.

DigForVictory

Flatten one overdraft & pay down some of the loan, if it's a high % APR. If it's manageable, flatten both overdrafts. Do please consider how you go into that situation, as routinely-maxed overdrafts are a bad idea.

Whatever the reasons, you can't afford to carry on - or you wouldn't need the bonus to clear some but not all of your debt. Have a go at a Statement Of Affairs & see what the debt free wannabee board can do to help you. It's tough love, but you'll be amazed at how much less you could live on & Not notice a difference, and if you are prepared to change your ways a bit once they're done, you'll be seriously financially better off!

NeverendingDMP

If you have no emergency fund you should try and start one. I know you should look at interest rates etc to compare long term costs but if you want to keep it simple why not pay of the overdrafts, cancel them or reduce to a 200 buffer. If you can afford it use the 60 a month that was wasting itself on fees to create an emergency fund. Uf yiu set up a standing order to a different account an emergency fund would begin to build. If you cant afford to divert the 60 in feed then you definately would benefit from a SOA to work out what you can afford.

wordswords

* Interest payment on the loan is 10%
* Overdraft interest is 17% on both, although if I lower my overdraft to £400 then there is no interest to pay, as I get a £400 interest free overdraft.


I think I will pay off my overdrafts, thanks to everyone who posted.

EssexHebridean

Personally I'd go with getting rid of the OD's - I always describe them as "dangerous debt" as they can, as has been said already, be recalled at any time and with no notice. The £60 that you have been paying in fees for them can make a start on building an EF as I see someone else has already suggested - it's not that MSE doesn't recommend this, quite the opposite in fact - a basic EF is something that everyone should really have - the level of this depends on your situation though. Renting, furnished - probably £250 will do you to start. Renting, unfurnished, or renting at all but own a car - aim for £500 starting point. And Homeowner, with or without a car = £1000.

There's a bigger picture here that you also need to look at though, and that is why you've found yourself £3000 in the red in the first place. Possibly a full overhaul of your budget needed, or maybe even putting together a budget in the first place?

HonmaDP

I had a £3.5k overdraft with Lloyd’s, we fell out over the extortionate charges they were taking from me. It came off my credit file last July and now I pay £1 every 3 months to a company who bought the debt.

iarniee

wordswords wrote: »

* Interest payment on the loan is 10%
* Overdraft interest is 17% on both, although if I lower my overdraft to £400 then there is no interest to pay, as I get a £400 interest free overdraft.


I think I will pay off my overdrafts, thanks to everyone who posted.

Surely you've answered your question, reduce both overdrafts to £400?

Then you can use the remaining money to start emergency fund.

System

wordswords wrote: »

I have a bonus of about £3000 arriving from work this month. I want to use it to pay off debt. I have three possible pools of debt to pay off:


* 2x current accounts maxed out on their overdraft, total sum ~£3000, costs £60 / month in total in arrangement fees
* A personal loan with a settlement figure of £5000, costs £160 a month in repayments
* Or I could use it to build up an emergency fund (which I know MSE doesn't recommend)






I was originally planning to put the debt repayment against the personal loan, but that won't affect my current monthly outgoings as it will just reduce the length of the number of payments of the loan.


Thoughts?

First one I would settle first after a quick glance

adg89

I'd get rid of your overdrafts to get yourself current, then you have an extra £60 per month income that was previously being used to pay overdraft fees.
After you've done that, build up a small emergency fund (1 month of expenses - say £1000).
Are you able to overpay on the loan or are you penalised for doing so? If you are not penalised, you can start overpaying the loan once you've got rid of the overdraft and have an emergency fund (make sure you commit to not using any other form of credit before you do this otherwise it negates the point in overpaying the loan).