Update: What would you do? CC or loan, please help

longtimelurker2020

Hi everyone, long time lurker here, as my name suggests. Thanks to this community I’ve turned my (financial) life around, but I’ll save my story for when I’m done debt busting. 

I have a few questions for you seasoned debt busters: I have two debts I’m currently attacking, three if you count the mortgage overpayments but this is about my unsecured debt. 

I’m taking the Dave Ramsey snowball approach of smallest balance first, and have just cleared and closed one credit card with a £10,200 limit, with CC2 (£8,000 balance) and a £21,000 personal loan left to pay off. 

Clearing and closing CC 1 means I now have £800 to throw at the next debt. On the face of it, CC2 would be next, right?

The thing is, £4,000 of my £8,000 balance on CC2 is 0%, while the rest is 20%. The interest on the loan is 23.9%. Just typing that makes me furious, but hey, I signed the credit agreement. 

My options are: 
1. Throw the £800 at CC2 for the next 5 months to bring it to £4,000 at which point it’s 0%, then switch to the loan.
The problem with this approach is that I won’t get the satisfaction of crossing the finish line with CC2. It will also take around a year and a half to clear the loan, and all the while I’ll have CC2 sitting around, half paid off - a reminder of my unfinished business.  

2. Focus on CC2 with ‘gazelle-like intensity’ as D Ramsey would say, and clear it in 10 months.
The problem with this option is that it means that blasted 23.9% loan keeps running in the background for longer. I’ve worked out how much interest the bank will be making off me each year and my head hurts. I’m set on denying the bank that interest, in the same way I’ve denied them a lot of interest on our mortgage (laughs vindictively) 

There is a third option - I get a bonus soon, and could squeeze out £2,000. Do I:

3a. Pay the bonus £2,000 to the loan and then focus on CC2 with the monthly £800 payments?
This approach will net off a few months of interest on the loan, reduce the loan term a bit, and give me the satisfaction of knowing I’m doing something about the loan while clearing CC2. Or, 

3b. Pay the £2,000 to CC2 and again focus solely on it so that I clear it in full in 7 and a half months with the £800 payments? 

As you can see there are different ways to approach this, and I need to choose one option and commit to it. I’m emotionally invested in this journey so I need an objective outsider’s perspective to help me decide. 

Hope you guys can help, many thanks in advance 

datlex

I'd go for 3b.  0% offers don't last forever.  Loans can't necessarily be over paid but they can often be settled early.  Have you checked with your loan provider?  I found when I was paying off my loan it helped to get a settlement figure on a regular basis so I knew when I had enough funds to pay it off.

Unicorn_cottage

Vote for 3a here. Now you only have 2 debts you need to be working them in tandem and I am sure it will give you a huge boost to see that loan under £20k!

DrEskimo

Why are you overpaying on the mortgage? Focus those repayments on the debts. If you are following the baby steps then mortgage overpayments isn't until step 6, after the starter EF, paying off debts, fully funded EF and 15% towards pension. 

Its only 5months that you will be paying towards the interest on the loan. I would just stick with the plan and get it cleared fully before moving to the loan. 

longtimelurker2020

datlex said:

I'd go for 3b.  0% offers don't last forever.  Loans can't necessarily be over paid but they can often be settled early.  Have you checked with your loan provider?  I found when I was paying off my loan it helped to get a settlement figure on a regular basis so I knew when I had enough funds to pay it off.

Thank you for replying @datlex . You made a good point about possibly settling the loan early. Can't believe I didn't think of that! The info is available in my bank's app. CC2's 0% period ends next summer.  

longtimelurker2020

Unicorn_cottage said:

Vote for 3a here. Now you only have 2 debts you need to be working them in tandem and I am sure it will give you a huge boost to see that loan under £20k!

Thank you for replying @Unicorn_cottage, I'm leaning this way - you're so right about the boost of seeing the numbers in the teens. Debts are much more than just financial burdens aren't they - there are emotional and behavioural factors at play as well! Hoping a few people might chime in, in case there's something I'm not seeing. 

-taff

WHy don't you work out the numbers for all the options and then pick the one that sees you spending the least?

JayRitchie

How much are your monthly loan payments and how long until it is cleared with basic payments?

longtimelurker2020

DrEskimo said:

Why are you overpaying on the mortgage? Focus those repayments on the debts. If you are following the baby steps then mortgage overpayments isn't until step 6, after the starter EF, paying off debts, fully funded EF and 15% towards pension. 

Its only 5months that you will be paying towards the interest on the loan. I would just stick with the plan and get it cleared fully before moving to the loan. 

Hey thank you for replying @DrEskimo, it's complicated.

I'm not following Ramsey's baby steps, what I said is that I'm following his approach to prioritising debts to pay, i.e. in ascending order. 

It's not possible for me to redirect my share of the mortgage repayments to my personal debts because the loan and CC2 are mine, while the mortgage overpayment is our joint project. I've read a number of threads here where regular forumites appear shocked that some couples keep their finances separate, and counsel against it, but it works for us and I wouldn't have it any other way. (You might not think that way, I'm just raising the point.)

At the end of it all I suppose I would've completed the baby steps, but not in the sequence Ramsey promotes. I have an emergency fund, and my partner and I committed to paying off our mortgage long before I began my personal debt busting, in fact it was my search for an online mortgage overpayment calculator that led me to the MSE site. What an epiphany - carrying high levels of personal/consumer debt is not normal. It's strange but depriving myself of holidays and meals out to pay off the mortgage came naturally, but I didn't have the same attitude to the loan and CC until MSE. Stupidity or social conditioning, who knows. 

We're nearly there - our mortgage is now in the teens and we plan to clear it in full by the time the fixed term ends next autumn. My plan is to have cleared CC2 and made a serious dent in the loan by next autumn as well, so that by Christmas 2021 I'd be staring the end of my debts in the face.     

longtimelurker2020

-taff said:

WHy don't you work out the numbers for all the options and then pick the one that sees you spending the least?

@-taff when you say 'spending the least', do you mean the option that would cost me the least in interest, or the option that would mean a lower outgoing?

longtimelurker2020

JayRitchie said:

How much are your monthly loan payments and how long until it is cleared with basic payments?

Monthly loan payment is just under £600 and the loan is scheduled to end at the end of 2023.

As you know, they've front-loaded the interest so at the moment approx £350 (ish) of the monthly payment is interest. Total interest over the life of the loan will be around £14,000!  I'd rather eat my left ear than pay that much interest. 

I considered making a regular overpayment of £350 to cover the interest payments so that the £600 goes further, but the £350 would have to come out of the available £800, limiting my inroads on CC2. Too many options and I wondered if I wasn't complicating things.