Personal loan to pay overdraft

mattrattley

Hey team,

With HSBC raising their overdraft fees to 40% in the spring, I've been caught out by excessive spending through my 20s. Over this year I've been diligently trying (and somewhat succeeding!) to get my total debt down, but mostly by paying credit cards off; my overdraft is still sitting around -£4k or so, and this is going to be a big problem as the interest rate is imminently about to double.

My credit history is limiting my options for credit, but I have sourced a personal loan with a 26% interest rate - high, but better than 40%. My question is, do I take that to pay the overdraft off, or should I just take the hit on the high interest overdraft and prioritise paying that down, above paying lower-interest credit cards? In terms of raw numbers, it surely makes sense to pay back -£4k @ 26% interest versus -£4k @ 40%, although repayment terms will obviously affect which one ultimately ends up being more expensive. The biggest problem I can see is, what if I end up with both a loan and my overdraft if I'm ill disciplined...

Also just to save people the time - I'm already working hard on paying my debts, this year has gone well but it will be quite a few more before I'm clear (which is fine). I don't need advice on how to save more, and I fully understand that this is a self-created mess - I take responsibility for, and recognise, my poor decision making in the past. You're welcome to tell me I'm a fool for being in this position in the first place, and you're absolutely right - just trying to find an efficient route through to sorting this and was hoping for some insight!

Cheers,
Matt

[Deleted User]

Hi Matt have you considered approaching the bank for a loan to repay the o/d? on the basis that if they give you a loan at a decent rate they can reduce your o/d limit to zero? just a thought.

mattrattley

I filled in an online form for a loan with HSBC but was rejected - I haven't had much luck "in person" with them before, but that could be an option. As you say, if it's paired with removing my overdraft facility, then perhaps their decision would be more favourable!

Terry_Towelling

Servicing a debt with a lower interest rate is generally better, although you need to check that you can overpay the loan without penalty. I say this because loans tend to have fixed periods and payments, and you might end up paying more in total interest if the loan is over a long period, when you might have been able to clear the overdraft in a much shorter space of time by varying the rate at which you pay it down. I can see, from the way you write, that you have already considered this angle. Even if you were to end up paying more in total interest on a loan in the long run, it still might improve your monthly cash-flow in the interim.

If you are worried about ill-discipline, then just throw everything at the overdraft and forget the loan.

mattrattley

It's an interesting puzzle - I don't think I can predict with much accuracy how quickly I could be entirely out of my overdraft, but my feeling is it's somewhere in the 2-3 year range since I have to maintain minimum payments on other debts at the same time. Plus obviously life is unpredictable at the best of times! So I could take the loan from 1-5 years with basically the same rate - I think the most aggressive repayment time I could manage is 3 years, but as you say, maybe paying a little more in the long run for a little more leeway (especially given that I have other debt to manage too) is a better idea.

I'd like to think I can maintain this for a while yet, especially since I feel infinitely better seeing my finances move in the right direction. Maybe I just need to back myself and trust that I've learned from my mistakes...

boo_star

mattrattley wrote: »

It's an interesting puzzle - I don't think I can predict with much accuracy how quickly I could be entirely out of my overdraft, but my feeling is it's somewhere in the 2-3 year range since I have to maintain minimum payments on other debts at the same time. Plus obviously life is unpredictable at the best of times! So I could take the loan from 1-5 years with basically the same rate - I think the most aggressive repayment time I could manage is 3 years, but as you say, maybe paying a little more in the long run for a little more leeway (especially given that I have other debt to manage too) is a better idea.

I'd like to think I can maintain this for a while yet, especially since I feel infinitely better seeing my finances move in the right direction. Maybe I just need to back myself and trust that I've learned from my mistakes...

2-3 years to repay £4K is pathetic.

You're either in over your head or going very easy on yourself.

-taff

boo_star wrote: »

2-3 years to repay £4K is pathetic.
You're either in over your head or going very easy on yourself.

Congratulations on the MSE Most Useless Post of the Day, only posted to make yourself feel better and castigate someone whose circumstances you know nothing about.


OP, paying minimum payments on other debts? Are these debts 0%? I hope so!
If not, go to the debt free wannabe board and post a SOA.
As long as you're going to pay off the overdraft with it and not incur any more debt, you have costed the amount you're paying in interest ove the total life of the loan and the total life of the overdraft, and further down the line if you do decide to have the loan,you look for another less interest heavy loan to replace it, absolutely only borrow the amount you need [ not more to 'give you a cushion'] itshould be fine.



Have you spoken to the bank about reducing your overdraft facility by a certain amount each month?

Willing2Learn

mattrattley wrote: »

I don't think I can predict with much accuracy how quickly I could be entirely out of my overdraft, but my feeling is it's somewhere in the 2-3 year range since I have to maintain minimum payments on other debts at the same time.

If you are only able to maintain minimum contractual payments on your other accounts while clearing your overdraft, then you are in financial difficulty. On that basis, I agree with -taff and suggest that you post your SOA in the DFW board.

mattrattley

Cheers team, some great advice there!

So as far as my other repayments are going, I wasn't clear it seems - so I am ensuring I make minimum payments on everything, and then I'm putting additional money into the highest interest debts I have. Typically I have £100-£400 pm extra, especially since I've taken on some extra tutoring work of an evening (and I'll be doing more of that through this academic year as demand increases). My income is somewhat variable (combination of part time steady salary + some freelance work) which makes it all a bit harder to rigorously pin down, although having done it for a few years it's not that variable and I know when the ups and downs in the year are.

From March, my overdraft would be my highest interest debt, so I'd maintain minimum payments on everything else until I was clear in the green on my bank account - then return to putting a surplus into the next highest rate debt. 2-3 years is probably a bit conservative if I put all my resources into getting that cleared - reading around the forums here has given me plenty of ideas to trim the fat which will also help. With that said, through this year I have paid off a card and am halfway through another, so I'm going in the right direction - just not at light speed just yet.

First steps seem to be:
- talk to HSBC about getting a loan to pay my overdraft, including the potential for favourable terms if I remove my overdraft facility at the same time - sceptical they'll help, but obviously a good idea
- evaluate payments per month & total paid for overdraft versus various loan options I currently have (including anything better HSBC can offer) - any excuse to crack out a spreadsheet
- depending on the outcome of those two, if I'm still stuck with only bad to average options, I'll post my SOA and see where else I can optimise ins/outs

Willing2Learn

mattrattley wrote: »

...I am ensuring I make minimum payments on everything, and then I'm putting additional money into the highest interest debts I have. Typically I have £100-£400 pm extra...

From March, my overdraft would be my highest interest debt, so I'd maintain minimum payments on everything else until I was clear in the green on my bank account - then return to putting a surplus into the next highest rate debt.

Okay, so if I understand you correctly, after making your contractual minimum payments, you have an extra £100-£400 pcm with which to repay the account with the highest APR. You are snowballing your debt then.

Tip: If you are making the minimum contractual payments on a credit card account, then you have to be careful that you don't fall foul of the persistent debt rules. Pay a little extra each month toward these accounts each month so that you are not identified as being in persistent debt.


https://www.moneyadviceservice.org.uk/en/articles/persistent-debt

Willing2Learn

Just wanted to add, that if you are contemplating getting a personal loan to repay your overdraft, then you might want to check your eligibility for a money transfer (MT) card with a 0% APR promotion. If eligible for an MT card then you could use that to shift the debt from your overdraft to a card. There is an MT fee, but hopefully that will work out less than the interest you would pay on a loan.