Clearing multiple debts with inheritance. But which ones take priority?

BigDV8

Hi all, 

This is my first post here and I could do with some guidance. I really am struggling to work out what is best to do here. 
So cut long story short like many over the last couple years it has been a financial struggle, coupled with some job loses and changes and some car troubles i have ended up in around £24,000 worth of debt. This is divided across 3 loans and a credit card. 
My dear nan passed away recently and I am due some inheritance to which i would like to clear some of these debts. roughly £18,000 is due. 
Clearing all of these would see me free up around £700 a month so it would be great to put a dent in that!
I am struggling however to work out though which is best to clear first etc so thought if someone could point me in the correct direction. Here is what is owed as of today's date and the length of loan left. 

MBNA Credit card - £5,966  @ 25.97% p.a - currently min payment £137
RBS Personal loan - £2,832 @ 3.40% - £206 a month with approx 14 months left
Updaft loan - £7,034 - @ 12.90% - £192 a month with approx 44 months left
Updaft loan - £6,773 @ 14.90% - £190 a month with approx 44 months left

Thanks in advance 

MattMattMattUK

BigDV8 said:

Hi all, 

This is my first post here and I could do with some guidance. I really am struggling to work out what is best to do here. 
So cut long story short like many over the last couple years it has been a financial struggle, coupled with some job loses and changes and some car troubles i have ended up in around £24,000 worth of debt. This is divided across 3 loans and a credit card. 
My dear nan passed away recently and I am due some inheritance to which i would like to clear some of these debts. roughly £18,000 is due. 
Clearing all of these would see me free up around £700 a month so it would be great to put a dent in that!
I am struggling however to work out though which is best to clear first etc so thought if someone could point me in the correct direction. Here is what is owed as of today's date and the length of loan left. 

MBNA Credit card - £5,966  @ 25.97% p.a - currently min payment £137
RBS Personal loan - £2,832 @ 3.40% - £206 a month with approx 14 months left
Updaft loan - £7,034 - @ 12.90% - £192 a month with approx 44 months left
Updaft loan - £6,773 @ 14.90% - £190 a month with approx 44 months left

Thanks in advance 

Clear the highest interest first, your net debt after clearing should be £4,605 based on getting £18k. However double check if the loans come with early repayment charges. All being equal clear them in the order below.

MBNA Credit card - £5,966  @ 25.97% p.a - currently min payment £137
Updaft loan - £6,773 @ 14.90% - £190 a month with approx 44 months left
Updaft loan - £7,034 - @ 12.90% - £192 a month with approx 44 months left
RBS Personal loan - £2,832 @ 3.40% - £206 a month with approx 14 months left

BigDV8

Thanks Matt

redux

Definitely clear the credit card first, then keep an eye on it to see whether it makes any balance or money transfer offers

If it does, do a money transfer to your bank account and use that to clear the remainder of the two loans at 12.9 and 14.9%

If not, step up the monthly payments to those two to repay them faster

I don't think you need to rush the RBS loan to repay it early. Once the others are cleared you'd be slightly better off if you stay on its original schedule and start a couple of monthly saver accounts paying 5 or 6%

BigDV8

Thanks Redux. I have a 12 month 0% on balance transfers with that card which is ongoing. so 12 months each time it is done if that makes sense. 

redux

BigDV8 said:

Thanks Redux. I have a 12 month 0% on balance transfers with that card which is ongoing. so 12 months each time it is done if that makes sense. 

I wondered if there would be. I have Halifax and Lloyds, and now MBNA is in Lloyds group I thought it might be similar.

enthusiasticsaver

I would clear the MBNA credit card first as that is the most expensive then tackle the Updaft loans as much as possible but check on early repayment penalties. If you are able to get 0% deals on a money transfer you could move the loan to one.

I would keep some back for emergencies. 

The RBS loan is a fairly low rate so I wouldn’t worry so much about that. 

Going forward I would keep hold of your budget and use some of that £700 saved on debt repayments to get into a savings habit. 

IainHL

I'm going to buck the trend here and suggest a different approach. Just because the RBS loan is the lowest interest rate, it is however the current highest monthly repayment.

I would repay the 3 loans, which will take up £16,639 of the inheritance (presuming no early repayment penalties). This will release £588 per month. If all of that amount was repaid to the credit card each month, along with the current minimum repayment amount of £137, the credit card would be cleared in about 10 months.

The rest of the inheritance can then either cover any early repayment charges, be used to reduce the balance on the credit card, put aside for emergencies, or spent on some sort of treat in remembrance of your dear Nan.

redux

IainHL said:

I'm going to buck the trend here and suggest a different approach. Just because the RBS loan is the lowest interest rate, it is however the current highest monthly repayment.

I would repay the 3 loans, which will take up £16,639 of the inheritance (presuming no early repayment penalties). This will release £588 per month. If all of that amount was repaid to the credit card each month, along with the current minimum repayment amount of £137, the credit card would be cleared in about 10 months.

The rest of the inheritance can then either cover any early repayment charges, be used to reduce the balance on the credit card, put aside for emergencies, or spent on some sort of treat in remembrance of your dear Nan.

Really rather surprising, and fortunately not many people would follow this approach.

That idea would cost about £700 in further interest on the credit card, whereas our other suggestions might cost £110 to £150 in fees and interest, and there's scope for some savings interest alongside the last 9 or 10 months of the low rate loan

There is no need at all to speed up repaying a loan that is fixed at 3.4%, and will have only £60 of interest on it in the remaining term, when monthly savings accounts can opened at 5 to 6 or even 7%.

A new money transfer offer at MBNA might be an initial 4 or 5% fee for 12 or 15 months, so £50 on £1000 or £100 on £2000. But despite my previous suggestion it isn't that necessary. Without doing that putting £465 a month to the about £1800 remainder on the two higher rate loans would clear them in 4 months, costing about £50 in interest

TheAble

It's important as well to analyse your spending, be honest with yourself and work out how not to get into this situation again. Else, fast forward a year or two and the debts will be back up but this time no inheritance to get you off the hook. It's a variation on the consolidation problem.

EssexHebridean

A +1 here for what TheAble says above - there is a huge risk with clearing debts due to a windfall like this that the "lessons aren't learned" as there hasn't been a process followed which gives space to learn, to refine budgets etc. To an extent, while paying off debt over time is painful, it's also a situation where feeling that pain can be a big advantage, as having felt it, you don't want to feel it again! 

Disregarding immediately the inheritance question - have you put together your SOA (Statement of Affairs) and got a viable working budget in place? Are you now setting money aside each month for car expenses for example - both the planned (MoT Test, servicing, new tyres etc) and a bit extra on top for contingencies that you weren't necessarily expecting? Is your emergency fund in place and being added to monthly? Do you budget for "big annual" expenses like holidays, and perhaps insurances? And do you know how much your monthly surplus is and make sure you have that amount left at the end of each month? If the answer to any of those questions is no, then you need to be considering taking things right back to basics as a starting point. Ultimately you don't want to find yourself in 3 years time with another 24k of debt, and nothing to show from what your Nan so thoughtfully left you either - you will curse yourself if that's where you end up, so a bit of legwork now is well worthwhile. 

I presume in any event there is a while before you actually see the inheritance land in your bank account? If so then that gives you a bit of time to start getting a solid structure in place - go through the budget, make sure all savings that can be made, are being made, and see if there is anything extra you can throw at the debts right now. Have you checked to see if you might be able to get a 0% balance transfer card? if so it would be a good plan to get some of the MBNA card shifted to 0% - even if you ARE using the inheritance that would still be a good approach in fact - if you could get that entire balance to 0% then that would suggest a different way of dealing with the rest of the debts to if that wasn't possible.