Pay off loan or credit card?

STW73

Hi everyone first time poster and needing thoughts on this please and hoping this is the correct forum for this?

I have a loan with RBS which costs me £95 per month and to clear it would cost £1750.  The loan ends in Sep 2024 and it was taken out in Sep 2014. 

I also have £4200 on MBNA credit card and the interest free balance transfer period ends this months and its costing about £100 a month in minimum payment and looking to transfer the balance to another interest free card.

I have about £4000 from some funds I've access to that I am going to use to clear off some debt. 

If you were in my shoes, how would you approach this? Would you clear off the RBS loan with £1750 and put £2250 toward credit card?  Then transfer the £2k MBNA balance to another card? This would free me up about £150 per month but if i was only paying the other £50 a month to new interest credit card and never using it I know it would take longer to clear.

Or would you clear off the credit card balance in total thus saving £100 a month and leave the RBS loan running for the next 18 months knowing its a fixed £95 and its almost an interest free loan at this point as ive been checking the repayment cost over the past few months.  

The logical part of my brain says clearing the larger credit card balance is the logical thing to do here and saving myself £100 per month and at least knowing the RBS loan ends in 18 months but would appreciate and outsiders thoughts in case I am missing something very obvious or there is another option I've not considered?

Thanks in advance 

MorningcoffeeIV

You need to clear the highest rate debt.  Your loan won't be interest free - it will still be at the contractual rate.

But before you can fully determine that, see what options you have for a BT or money transfer.

CliveOfIndia

OK, well IF you can BT the entire card balance to another card and IF there is no fee for doing so, then shift the credit card balance and pay off the loan.  But ... are there any early redemption penalties on the loan?  If there are, this may skew things.  What the APR on the loan?

The crux may very well be your ability to obtain a BT card.  Why not apply for a BT card now and see what you're offered?  If you are offered a deal, and especially if it's fee-free, then at least you'll know where you stand, and you should still be able to do the BT.

If you can only get a smaller limit then BT what you can and pay off the remainder.

If you're unable to get a BT card then pay off the card debt in full - I suspect that the APR on the credit card, once the 0% promotion expires, will be far higher than the loan.

To help you decide which route would be most productive, I would suggest you stop looking at the figures in terms of "£100 per month" or whatever and focus instead on what interest rate your paying.  All other things being equal, simply repay the debt that's costing you the most interest.  But you do need to take into account any fees/redemption penalties that may be applicable.

macman

As above. What matters is the total cost of the loan, over the full term. Not the monthly repayment.

STW73

Thank you both for your replies 

The APR on the RBS loan is 4.9%.  The balance on the loan today is £1729.39 and to pay it off in full would cost me £1750 so very minimal penalty. Perhaps as its 8.5 years into 10 year term?

When the interest fee period ends of my credit card at the end of this month the standard interest rate is 22.13% variable.

From looking at the offers available to me via Experian, Credit Karma, Clear Score I dont seem to be getting offered and BT fee free cards.  Typically looking at between 2% to 3% depending on length of interest free offer.  Off course the best deal on offer is from MBNA who I already have the card with!

Thanks again, a lot of very useful info for which I am most grateful 

enthusiasticsaver

I would put it towards the credit card. The loan is at a reasonable rate but from the sound of it a new Bt deal may not be forthcoming to transfer the MBNA card to  and you will probably incur a fee or the interest rate when the deal expires will be way higher than the loan. Once the card is finished put half the £150 into savings to replenish the funds and the other half as a loan overpayment. 

Herzlos

You'll probably struggle to get a BT rate under the 4.9% for the loan, so I'd be inclined to use the money to clear most of the credit card, and then use the saved repayments to overpay the loan.

Once the credit card is cleared, if you get an offer for a money transfer at under 4.9%, you can always use that to clear the loan.

As mentioned above, it's probably worth putting some of the saved repayments into savings too.

STW73

Thanks everyone for your replies on this.  I hadnt even considered the option to clear the card and used saved repayments to overpay the loan so thats a good suggestion that I shall look into. 

FashionHeart

STW73 said:

Hi everyone first time poster and needing thoughts on this please and hoping this is the correct forum for this?

I have a loan with RBS which costs me £95 per month and to clear it would cost £1750.  The loan ends in Sep 2024 and it was taken out in Sep 2014. 

I also have £4200 on MBNA credit card and the interest free balance transfer period ends this months and its costing about £100 a month in minimum payment and looking to transfer the balance to another interest free card.

I have about £4000 from some funds I've access to that I am going to use to clear off some debt. 

If you were in my shoes, how would you approach this? Would you clear off the RBS loan with £1750 and put £2250 toward credit card?  Then transfer the £2k MBNA balance to another card? This would free me up about £150 per month but if i was only paying the other £50 a month to new interest credit card and never using it I know it would take longer to clear.

Or would you clear off the credit card balance in total thus saving £100 a month and leave the RBS loan running for the next 18 months knowing its a fixed £95 and its almost an interest free loan at this point as ive been checking the repayment cost over the past few months.  

The logical part of my brain says clearing the larger credit card balance is the logical thing to do here and saving myself £100 per month and at least knowing the RBS loan ends in 18 months but would appreciate and outsiders thoughts in case I am missing something very obvious or there is another option I've not considered?

Thanks in advance 

As for all of the above advice, I will always think about the interest rate - because the way I think of it is the higher the rate, the more you will have to pay in the long term.

Coincidentally, I only just consolidated my loans recently (last week as it happens) - only because I was paying way too much interest rate, and it was the best decision I've made so far this year otherwise I would forever be paying too much when I could be saving and most importantly reducing debt.

Ryan_Holden

+1 for the credit card, as much as you can.

Get that cleared first then use the credit card money you're used to paying out each month to overpay the loan.

Edit - then, if I may, if you don't trust yourself (honestly) to not get into this situation again, cut that card up and cancel it.