Interest charges

spudsmum

So I have been doing really well with paying off my debt however sadly my husband's car has now died and we need another one.

We have no savings currently as, typically I had to replace my car last month which cleaned out the car account.

I have a money transfer offer on my credit card - £2500 over 36 months at 3.9% pa. I'm thinking this is cheaper and more sensible than a loan however I'm struggling to work out how much exactly i will pay in interest to see if its in my budget.

Can anyone help me work it out please?

[Deleted User]

It depends on the rate at which you pay it off.

Interest is charged on your daily balance, so the more you pay and the earlier you pay it, the less interest you pay.

Your first month's interest on your opening balance would be in the region of £8 - plus whatever the minimum payment is on your card, usually 1%.

Terry_Towelling

What credit card do you have? Many charge a minimum payment of 1% of the balance (including any interest charged) plus the amount of the interest. Barclaycard has a different approach and asks for at least 2.25% of the balance.

So, if you got a (non Barclaycard) statement showing £2500 and £8 interest (£2508 in total), you'd have to pay at least £33.08 (£25.08 + £8). The trap you need to avoid is paying the minimum each month because it will reduce slightly as the overall balance reduces. That means you'll be paying it off for years and years.

The best strategy is to decide what you can afford each month and (as long as that is more than the minimum asked for) always pay that same amount each month (or more if you can).

I've done some calculations (very rough and with a few assumptions) and come up with the following:-

1. Paying the minimum (as described above) would leave you with about £1700 left to pay after 36 months. Paying this way would take you 'decades' to clear - not least because the interest would be hiked up after 36 months.
2. Paying a set £35 per month would see you with about £1450 left after 36 months. I can't say how long before the debt would be gone because I don't know what the rate would be after 36 months.
3. At £50 per month, you'd be down to about £900 after 36 months.
4. At £75 per month, it will just about be cleared by 36 months.
5. At £100 per month, you'd clear the debt completely in about 26 months.

A used car costing £2500 isn't likely to be completely trouble-free in the medium term, so you need to get as much as possible paid off within the 3 years - just in case. You might also consider paying a small deposit by credit card directly (about £20 or so, if the dealer will allow) and the balance by MT. I know this will increase the overall interest burden a tiny fraction but you might gain some S75 protection as a result. S75 protection is not a universal cure-all for used car issues but it won't hurt to have it.

spudsmum

Thanks both it's an MBNA card so payment is 1% of the balance plus interest.

I always pay off extra - min payment is currently £60 (from previous BT) and I pay £200 to make sure the BT is paid off in time.

I have 2 MT deals currently - 0% for 18 months with a 4% fee and 3.9% over 3 years. I'm trying to work out which will be better. I dont think I'll clear the £2.5K in 18 months when the interest would go up to 27.9% so just trying to work out how much more it will cost me to take it over 3 years if that makes sense.

I normally save £100 a month for car maintenance so i would use some of that to pay off the 2.5K instead of banking it.

Terry_Towelling

spudsmum wrote: »

I normally save £100 a month for car maintenance so i would use some of that to pay off the 2.5K instead of banking it.

This is a tricky balancing act. Should you save for potential problems with the car, or should you pay down the card debt more quickly? Generally speaking, I'd divert the whole £100 to clearing the debt. If the car goes wrong you can always use the freed-up capacity on the credit card to pay for repairs. I accept there may be a marginal interest-hit if you do it that way but, hopefully, the car won't go wrong (fingers crossed) and you'll end up saving more over the life of the debt.

spudsmum

Thank you Terry.

At this point, having just bought one car, I cant spend more than £2.5k on a second without getting finance or a loan and i dont want to overstretch myself - plus I've found to my cost in the past that spending more on cars doesn't guarantee they will last longer! Luckily its just for husband to run back and forth to work.

Good idea about putting all the £100 on the credit card though - that makes a lot of sense

Terry_Towelling

The various offers are now making for a more complex picture given that we now know you have an existing promotional balance on the account.

I don't know how MBNA allocate payments but I imagine they apply them to the portion of the balance that has the highest interest rate first. If portions of the balance have the same interest rate then they will probably be applied to the oldest item first. That could be quite crucial and I suspect it rules out the 0%-for-18-months-with-4% fee offer.

So, if your BT is at 0% and you take the No-fee-3.9%-MT offer, all of your payments will be diverted to paying the interest-bearing MT deal first. So if you carry on paying your £200 and the extra £100 originally intended for the car contingency fund, you will clear the MT within about 8 months. Your BT balance will remain untouched during this period and payments will only be re-directed to the 0% BT balance when the MT is cleared.

So the question now is how long does your BT offer last? I'm guessing it will go for another 30 months and that you owe £6K (if your min payment is currently £60 and you expect to clear it in that time at £200 per month). If I've got that right (probably haven't) then you will need to keep your payments at £300 for the duration (approx. 28 months from now) in order to clear the total balance within the time frame.

Please remember I don't know how MBNA allocates payments when there are multiple balance elements, so the above is a 'best guess'.

spudsmum

Yes you are correct.

Hmm not as straightforward as i first thought - might have to do some more number crunching. Thanks