Settlement Figure vs Large Monthly Overpayments

Noobie2011

Hi All,

Hoping someone can help here as confuses the hell out of me.

We have been in the position for a while where we are chucking large monthly sums now at our debts and have just cleared all our Credit Cards.

Next up we a few loans to go after but hoping someone could help me understand which would work out cheaper below in regards to paying the debt off.

Option 1 - Pay the standard loan payment each month and alongside save the extra money we have until it adds up to allow us to ask for a settlement figure and pay that off

Option 2 - Just make the maximum overpayments we can until the debt is paid.

What I have tried to understand and I cannot is we have say a Loan which has £11,500 left on it if pay to the end date but then has a settlement figure of roughly £8,500. If we chuck say £1,300 a month(includes the standard payment) will we end up paying a lot less than £11,500 to clear it or because we are just paying monthly and not doing it the settlement way in one go will we end up paying more of the £11,500 back.

Sorry for the confusion but I cannot just get my head around what is the right option so help would be appreciated and any extra info needed just ask.

Rob5342

It all depends on whether you are paying interest, and whether they have defaulted or not. If you are paying interest and it's not defaulted then you want to pay as much as possible each month to reduce the amount of interest you pay overall. In that situation they would be unlikety to agree to a reduced settlement. If you aren't paying interest and they have defauled, then you want to pay as little as possible so they are more likely to agree to a reduced settlement.

Noobie2011

Rob5342 said:

It all depends on whether you are paying interest, and whether they have defaulted or not. If you are paying interest and it's not defaulted then you want to pay as much as possible each month to reduce the amount of interest you pay overall. In that situation they would be unlikety to agree to a reduced settlement. If you aren't paying interest and they have defauled, then you want to pay as little as possible so they are more likely to agree to a reduced settlement.

Cheers for the reply.

So I am paying interest. If helps details of the 2 loans are below. I have not defaulted on the loans either so that is not an issue.

Remaining loan: £11,500
Settlement offer: £8,800
Interest: 15.5%

Standard Payment: £222
Potential overpayment(includes standard payment): £1,600

Remaining loan: £10,500
Settlement offer: £7,800
Interest: 19.9%

Standard Payment: £277
Potential overpayment(includes standard payment): £1,600

The overpayment would only be on 1 loan depending on which I chose which currently thinking the higher interest one.

So you can see if saved the money to then settle I would have enough in about 4/5 months if not less as each month the settlement figure would come slightly down. Or would it work the same doing overpayments as paying that much every month would reduce the same in interest

SusieT

I have just run the numbers on my (mortgage, but same principle) spreadsheet to gie very approximate numbers. If you pay the highest interest rate first, the 10500 loan will be repaid in April, and the 11500 will be repaid in October and interest will be 2253. 
If you pay the highest loan first it will be cleared in May (around 950 needed, and the remainder rolled to the other loan), with the smaller loan finishing in November (with around 340 to pay) and you wll pay 2473 in interest so you would save around £220 in interest by paying the 10500 one first.
Again, very approximate numbers!

Noobie2011

SusieT said:

I have just run the numbers on my (mortgage, but same principle) spreadsheet to gie very approximate numbers. If you pay the highest interest rate first, the 10500 loan will be repaid in April, and the 11500 will be repaid in October and interest will be 2253. 
If you pay the highest loan first it will be cleared in May (around 950 needed, and the remainder rolled to the other loan), with the smaller loan finishing in November (with around 340 to pay) and you wll pay 2473 in interest so you would save around £220 in interest by paying the 10500 one first.
Again, very approximate numbers!

Thanks for this as really helps.

So I think with either option of how I pay it I would go with the higher interest first.

I think your answer clarifies everything as I thought even if I pay £1600 a month I would still be paying until the original £10,500 was cleared but I am presuming actually the £10,500 would reflect the lump sum paid each month and not only come down by the lump sum but also the reduced interest?

So my other option of saving the lump sum up each month until I have enough for the settlement would not really help and also do not want the risk of having the money sitting there where I could spend it