Question about snowballing or refinancing

matttye

Hi 

I have a loan and two credit cards. The two credit cards are in an interest free period whereas the loan is 21.5%.

I have never missed a payment on any of the debts and don’t have any missed payments, defaults, etc on my credit report. The negatives on my report will be that I do not usually have much left at the end of the month (on my base salary but I have opportunity to earn a lot of overtime) and also that my credit utilisation is high ie my cards are near their limit.

I have just had a pay rise and will be able to make significant overpayments on my debts from now on.

I understand how snowballing works and logically I would think it is best to overpay the loan, but I’m just wondering whether paying off the cards first might make it more likely that I can get a loan with a better interest rate thus saving money in the long run.

Any thoughts greatly appreciated.
Thanks

sharpe106

In the short term no, so unless you have a massive loan it be a lot better to pay of the loan now, then pay of the credit cards and hope to get a lower loan in the future. 

If your credit cards let you do a balance transfer you could do that for part of your loan, usually costs to do a balance transfer but will be cheaper in the long run. 

Fireflyaway

I'd caution against hoping to get another loan. It's just moving money about and would probably be better to save interest by paying off the debts quicker. I've paid debt in the past by consolidation loans and by just getting on and paying it. The latter was more motivating. 

matttye

Fireflyaway said:

I'd caution against hoping to get another loan. It's just moving money about and would probably be better to save interest by paying off the debts quicker. I've paid debt in the past by consolidation loans and by just getting on and paying it. The latter was more motivating. 

I get what you’re saying but if I can get a loan for half the interest rate it’s a no brainier surely. 

sharpe106

But you probably won't get one straight away so you be better off addressing the loan now. When offering loans companies are much more interested in how much debt you have then to how many different people.

enthusiasticsaver

I would tackle the loan first as the rate is so high. You are unlikely to be offered another loan at a favourable rate any time soon so paying that 21% debt off first makes more sense. 

ryanm8655

What are the values of the debts and when do the 0% offers expire?

21% is a horrendous interest rate on a loan (and I’ve had loans at horrendous interest rates in the past) and, from experience, I‘d be very surprised if you can consolidate for cheaper. That suggests lenders view you as high risk. Not to mention, consolidation is generally a terrible idea as generally people come back a couple of years later with double the debt. Just look at my post history and you’ll see I was one of those people.

My advice would be to clear the highest interest rate debts first, so in this case, the loan. Set your dd on the credit cards to just above the current minimum to help with budgeting (also makes a big difference to the rate at which the balance goes down). Though if the 0% periods end soon then it may make sense to focus on those.

Have you properly addressed your approach to money? Why has the debt built up in the first place? Not meant as a dig, I’ve been in debt ever since I finished uni and only now (10 years later) has my mentality really changed.

I’d recommend completing an SOA as this’ll help people to offer more tailored advice.

https://www.lemonfool.co.uk/financecalculators/soa.php

Andyjflet

Please dont borrow any more money, pay the credit cards then snowball onto the loan. Listen to Dave Ramsey Podcasts it will change your life. 

matttye

ryanm8655 said:

What are the values of the debts and when do the 0% offers expire?

21% is a horrendous interest rate on a loan (and I’ve had loans at horrendous interest rates in the past) and, from experience, I‘d be very surprised if you can consolidate for cheaper. That suggests lenders view you as high risk. Not to mention, consolidation is generally a terrible idea as generally people come back a couple of years later with double the debt. Just look at my post history and you’ll see I was one of those people.

My advice would be to clear the highest interest rate debts first, so in this case, the loan. Set your dd on the credit cards to just above the current minimum to help with budgeting (also makes a big difference to the rate at which the balance goes down). Though if the 0% periods end soon then it may make sense to focus on those.

Have you properly addressed your approach to money? Why has the debt built up in the first place? Not meant as a dig, I’ve been in debt ever since I finished uni and only now (10 years later) has my mentality really changed.

I’d recommend completing an SOA as this’ll help people to offer more tailored advice.

https://www.lemonfool.co.uk/financecalculators/soa.php

One card is £5k, the other is £3.2k. Not sure when the 0%s expire but I’ll try and find out. The loan I owe just under £11k (been paying it for a year and still owe more than I borrowed!)

Credit cards were to fund studies which have lead to me doubling my income. I started off paying for my studies myself then moved onto credit cards when I ran out of money. The loan was for my wedding. 

No need for an soa - I have around £500 left each month for debt repayments on my base salary but I usually make anywhere between £400 to £800 in overtime too (has been higher recently due to colleagues being on furlough). I’ll be able to overpay substantially every month but just want to do it the quickest and cheapest way. Looks like paying off the loan rather than hoping to refinance it is the consensus so I’ll do that. 

My salary with overtime is about £42.5k. 

Thanks

Andyjflet said:

Please dont borrow any more money, pay the credit cards then snowball onto the loan. Listen to Dave Ramsey Podcasts it will change your life. 

I know his methods work for some but I feel I’m disciplined enough to pay it off in the cheapest way possible rather than targeting the smaller debts first.

Thanks

Fireflyaway

Paying off a higher interest rate debt quickly is equal if not better than taking out more finance at a lower rate and possibly paying it slower.  Psychologically, refinancing can make you slow down. You feel you have taken action but in reality just moved the money about. I second checking out Dave Ramsey. Have a watch of the 'debt free screams' on youtube. It's really motivational. The other thing about taking out another loan is it's more borrowing on your credit file. That may not be an issue but if you need a mortgage for example, it's probably best not to make more applications. 

monetxchange

matttye said:

ryanm8655 said:

What are the values of the debts and when do the 0% offers expire?

21% is a horrendous interest rate on a loan (and I’ve had loans at horrendous interest rates in the past) and, from experience, I‘d be very surprised if you can consolidate for cheaper. That suggests lenders view you as high risk. Not to mention, consolidation is generally a terrible idea as generally people come back a couple of years later with double the debt. Just look at my post history and you’ll see I was one of those people.

My advice would be to clear the highest interest rate debts first, so in this case, the loan. Set your dd on the credit cards to just above the current minimum to help with budgeting (also makes a big difference to the rate at which the balance goes down). Though if the 0% periods end soon then it may make sense to focus on those.

Have you properly addressed your approach to money? Why has the debt built up in the first place? Not meant as a dig, I’ve been in debt ever since I finished uni and only now (10 years later) has my mentality really changed.

I’d recommend completing an SOA as this’ll help people to offer more tailored advice.

https://www.lemonfool.co.uk/financecalculators/soa.php

One card is £5k, the other is £3.2k. Not sure when the 0%s expire but I’ll try and find out. The loan I owe just under £11k (been paying it for a year and still owe more than I borrowed!)

Credit cards were to fund studies which have lead to me doubling my income. I started off paying for my studies myself then moved onto credit cards when I ran out of money. The loan was for my wedding. 

No need for an soa - I have around £500 left each month for debt repayments on my base salary but I usually make anywhere between £400 to £800 in overtime too (has been higher recently due to colleagues being on furlough). I’ll be able to overpay substantially every month but just want to do it the quickest and cheapest way. Looks like paying off the loan rather than hoping to refinance it is the consensus so I’ll do that. 

My salary with overtime is about £42.5k. 

Thanks

Andyjflet said:

Please dont borrow any more money, pay the credit cards then snowball onto the loan. Listen to Dave Ramsey Podcasts it will change your life. 

I know his methods work for some but I feel I’m disciplined enough to pay it off in the cheapest way possible rather than targeting the smaller debts first.

Thanks

You say you're disciplined, yet you've both ran up debt and have a loan that's not been repaid down at all from the starting point in a year (I realise it's high interest) despite having £500-£1300 a month spare. So where has that money actually been going if not all on the loan? Why have you run up credit cards too? Why will you all of a sudden become disciplined?

Look, this isn't an attack as I've been there too, but it's very important to address triggers and behaviours at the start. The reason why I'd also advise against getting more credit to consolidate is because it's so early on in turning around your money habits that you can't be sure the temptation to run them all up again has completely gone.

You can absolutely do this on a healthy income. Just get them paid down while learning to budget month to month properly.