Using funds in best way to pay debt off

spiral_3

Hello!

First time on here so would be very grateful for suggestions for my situation.

The bad news: I have around £15,000 of debt mainly comprising credit cards (circa £10000) and a PCP car loan that finishes at the end of September and would currently cost £5250 to settle.

The good news: thanks to a recent PPI payout (£4200) and a gift from my father (£10000) who has just sold a major asset I more or less have the money to settle the whole lot in one fell swoop.

The only problem here is if I did I’d have about 50p to my name! (Well not quite as a I do have something in my current account as I write this).

So my question is what amounts of the debt to pay off? I realise I have a golden opportunity to vastly reduce my debt burden - the sudden influx of funds came as a surprise in that I had no idea if my PPI claim would be successful let alone how much I’d be awarded, and I wasn’t expecting the £10000 gift either.

I know this flies in the face of what some (including Martin) would advise when you have debt outstanding, but I’d like to take this opportunity to have at least some money in reserve by way of an emergency fund. I’m on a relatively lowish income and have experienced a dip in work, so having something in reserve would be a major weight off my mind.

Here are the debts broken down:

MBNA credit card - 18.44% on purchases - £4165 owing - currently paying minimum PM (approx £104)

Barclaycard - 9.71% on purchases - £2783 owing - currently paying minimum PM (approx £62)

HSBC - 17.9% on purchases - £3066 owing - currently paying minimum PM (approx £77)

PCP car loan - 4.5% APR - £5250 owing (as of mid February) - paying £177 PM.

It finishes end September leaving a balloon payment of £4100  

I earn around £15000 per annum (fluctuates a bit as self employed) and my monthly outgoings total around £821 including all the payments as shown above. They make up just under half of my outgoings in total (£401)

I was thinking along the lines of spending around £10000 to clear debts and leave me around £4000 to put in reserve at least for now. If I get an upswing with work I’d look to attack whatever debts are left.

My guess is that you’ll advise me to settle the most expensive debts, so one option is to pay off all the credit card debt which would cost about £10000 leaving me with the car PCP until September. This cuts my monthly outgoings by £243 and I’ll no longer be paying about £120 overall PM in interest.

That said I’d have the car loan left and the looming £4100 balloon payment to pay in September if I decided to keep the car as opposed to starting a new PCP or other. 

Another option is to pay off the car PCP, the most expensive card (both in interest and balance) which is the MBNA one and overpay say £20 a month on the HSBC and Barclaycard credit cards. Again, this would take around £10000 to do.

This option would reduce my monthly outgoings by £240 and leave me with the HSBC and Barclaycard, although I’m committing to overpaying on both (£20 PM extra min) so vastly reducing the time it’ll take to pay them off (but resolving to attack these further as finances permit).

It also means I own the car, don’t have to fret about paying the £4100 balloon, and remove what is the largest single payment from my monthly commitments.

Two final points to make: 

In giving me the gift my dad is keen for me to pay the car off: he’s just got this thing about having debts on cars (he ran a business and always paid cash for his - and we weren’t talking cheap runabouts either!)

Perhaps paying some of the car off would ‘honour’ his wish - but please don’t let this ‘request’ hobble any advice you’re prepared to offer me. I’ve requested from the car finance people an example of what difference it would make if I paid off say half the current settlement amount: £2700 in round figures.

I have received persistent debt correspondence from both HSBC and MBNA so, if the consensus was to leave some or all of HSBC debt in place for now, I would take steps to sort this. In fact, the ‘pay PCP and MBNA off’ option could perhaps include paying off around £500 off the HSBC balance.

I should also point out I haven’t spent on the MBNA or HSBC cards for some while, and if I do spend on the Barclaycard I settle these up quickly so no further debt is accruing on anything.

Apologies for such a long first post but hopefully it helps illustrate my position: many thanks for any help you can give me.

021286

I would say that saving some is okay, but only if you can be sure you will save it- what has caused the debt on the credit cards in the first place? Have you got a grasp on your overspending? If you don't/haven't, then I fear you will start with good intentions putting some money in savings, but this will quickly get frittered also and you'll end up with nothing to your name and the same debt as before. I only say this because I've done exactly that before now!

Personally if it were me I'd pay off the debt, because you'd be no worse off than you are now day to day- and in fact with no debts to continue paying you'd actually be better off and could then start building up an emergency fund from this. However I'm sure someone with more experience will be along with better advice in a minute!

EimearF

I am a believer in considering the wishes of someone who gives you a gift. Your dad wanted you to use that money for the car. So I would pay the PCP and keep the £4100 aside from the money he gave you. But the rest of the £10k into an emergency fund. 

Clear the MBNA with the PPI money. 
This leaves 2 cards, you have £281 more a month to throw at the HSBC now, which should clear this year. then snowball the Barclaycard. 

If you do an SOA people can advise on how to clear the cards quicker with some cut backs. 

Good luck! 

D_M_E

If it were me I would clear the car, MBNA and HSBC and then, out of what's now spare, put £100 monthly to building up savings and put the rest to clearin Barclaycard.

Sea_Shell

Have you identified how the CC debt accrued initially?  Gradually over many months/years (just living) or something more specific (furniture/holiday/household)?

You need to get to a place where you don't find yourself back in debt, down the track, even after paying this off. 
  
Another gift will probably not be forthcoming!

DrEskimo

spiral_3 said:

That said I’d have the car loan left and the looming £4100 balloon payment to pay in September if I decided to keep the car as opposed to starting a new PCP or other. 

Another option is to pay off the car PCP, the most expensive card (both in interest and balance) which is the MBNA one and overpay say £20 a month on the HSBC and Barclaycard credit cards. Again, this would take around £10000 to do.

Of course there is no need to buy this specific car. It's arguable that you bought a car you couldn't afford using high cost finance, and that argument could still be made now, even with paying cash for it.

Put it this way, if you didn't have this car on finance and were looking to buy a car given your current situation, would you be looking to spend £5k+? Why not buy a cheaper car that would be proportional to your income and financial situation?

You could get a valuation for your current car as trade value (use WBAC as your first valuation and get a base value, and then ring around various garages and dealers to ask what they would offer to buy it off you), and if that is the same as your settlement figure, you could trade it in, settle the finance and then buy a cheaper car on the used market. It's feasible you could negotiate a trade value that is higher that the settlement (whatever you do, don't tell them the settlement figure until after they make an offer!), so could increase your available funds to sort out getting a car and reducing your debt levels.

Another idea! Don't feel you are tied to this car only. There are other options.

db2016

have you checked to see if you can shuffle debts to 0%, and then you could drip feed a lil more than the minimums to that 0% and make sure its paid before it ends, keep the cash till then in interest earning account, so its earning you a lil bit till the 0% ends and then you can throw it (and the lil interest at the 0%).

Moneyminded

You're about to come into £14,200 congrats! 
If it were me in your situation I would 
1. Open a bank account somewhere new and put £1,000 aside as an emergency fund 
2. Pay off the MBNA card completely 
3. Pay off HSBC card completely 
4. See if the balance of the barclaycard could be shifted to a 0% balance transfer card, if not pay it off completely
5. Make a strict budget and stick to it to avoid getting in debt in the future
6. Save all the monthly payments that would have been made to the above, along with the rest of the money, to save for the balloon payment on the car/ buy a different car with the money come September for cash. 

monetxchange

Get the debts paid off. If I were you, I’d hand the car back, forget about the balloon payment and use maybe half of what you would’ve paid on a cheaper run around. I’m guessing you might not be keen on that after all the money you’ve sunk into it so far. But if you do pay it off, keep it until it falls apart. Getting this car finance that amounted to what, 75-100% of your yearly income has probably played a big part in you falling into debt.

Once you’ve got clear, you need to start living to a budget that is within your means or you’ll be back to square one again. You shouldn’t have “50p to your name” if you manage your money properly at the beginning of the month. I agree with your dad that getting stuff on finance because you don’t want to wait to save up for it isn’t good money practice - if you can’t pay for it without credit, you can’t afford it. See this as the blessing it is. Time to grasp money management while you can!

MidsHollie

However you choose to use this money doesn't matter a huge amount. What does matter now is that you really learn how to manage your money and budget properly - learn how to live within your means and save up for larger expenses. You have the money now, there is no need to make a knee jerk reaction. Does your Dad know about your other debt? If you are sensible with this,I think any way of doing this honors his gift. Basically, don't just pay off the debt and then rack it up again. 
Saying that,if I were in your shoes, I would pay off the two highest credit cards (approx £7000). I'd put the rest away for a while (£1000 for an emergency fund which you only touch in an EMERGENCY). I would then be as frugal as it is possible to be to pay off the Barclay card, which if you pay off £450 a month would be paid off in 7 months (is £450 a month achievable,without the other 2 cards payments?). This takes you to September, at which point you will have paid off the car and you can choose to use the £6000 left over to pay the balloon payment if you want to keep the car and have £2000 to start building a real emergency fund. 

This way you will get the benefit of paying off the high interest debt, and the benefit of learning to budget and live frugally whilst also learning how to have money in your account and not spend it. Good luck with your decision

On_my_way

I found Dave Ramsey hard hitting and a brilliant way of clearing debt and remaining debt free.