How to pay off debts - around £5k

EmilyInLondon

Hello, 

Wonder if I could have some help and advice on the best way to pay off my debts while paying minimal interest. I'm finding it a bit confusing... Over the past 5 years I have accumulated around £5k worth of debt in credit cards, overdraft and as a result of my most recent ex, as I ended up paying a lot more for bills, living expenses, car etc. 

My debt is made up of around £3.6k in a Sainsburys personal loan (which I took out last year for loan consolidation), and around £1.5k in my overdraft. 

I recently sold my car (I live in London so don't need it for work so I will go without for the foreseeable future) for £2.5k. After I sold my car I am no longer in my overdraft and I have an extra £1k. Which means I am just left with the Sainsburys loan to pay off. 

My question is what is the best way to pay off my debts while minimising interest? 

The Sainsburys loan has an interest of 10% so I end up paying around £35 per month just on the interest and I have around 18 months left of payments. The overdraft has a high interest (around 40%), I find that they don't tend to charge me a lot per month (max. £15 a month), because of the way the money comes in from my salary and the amount of days I'm on a minus of £2k (which is not a lot). 

Hence, it seems to me that being on my overdraft is a cheaper alternative to maintaining the Sainsburys loan and if I pay off the Sainsburys loan from my overdraft, I will end up paying less interest. If I do this, I will end up with a -£2.5k in my overdraft which I can slowly pay off with my salary. 

Are there any other cheaper alternatives? Would you recommend I get a 0% balance transfer card for some of the debt to pay even less interest? 

Hope this makes sense and sorry for the long post! 

Thank you, 
Emily

Mark_d

So you have a £3.6k loan and £1k left over from selling your car and repaying your overdraft.  I would recommend looking at a 0% balance transfer deal to repay your loan, and then you focus on repaying the credit card.

Overdraft can be a great way of borrowing if you're only doing it for a few days, but if you're using your overdraft for several months then it is not a good option at all.  You will end up paying more interest even if you don't realise it.

fatbelly

Glad to hear the overdraft debt is gone as the effective apr on that is 40-50%

You will not be able to BT your existing debt as it is a loan, not a credit card.


You may however be able to take advantage of the very few 0% money transfer cards that still exist.

https://www.moneysavingexpert.com/credit-cards/money-transfers/

If that doesn't work, post again and give us a soa

Andyjflet

Calculate the 0% money transfer cost and go that route, Well done for getting rid of the car. Keep the £1k as your emergency fund and now aggressively pay down the debt. 

kimwp

You say at one point the overdraft was 1.5k and at another point 2k.  Using 1.5k and £15 a month figures gives 12% which is comparable to your Sainsbury's loan. Overdrafts can be removed so considered to be the first thing to try to get rid of. 

Rather than decide between the two accounts you have, you should be looking at cheaper forms of borrowing to shift your debt to as the posters above have said. Use the link that fatbelly posted to check if you are eligible for a money transfer card.

In terms of the £1k you now have, you could use it to pay off some of the loan or keep it as an emergency fund. If kept as an emergency fund, this means planning to not use it and only dipping into it for true emergencies like job loss or breakdown of an essential item like a fridge. See how much you could get with a money transfer card and if it's not enough, maybe use the £1k to pay off the remainder of the loan?

EmilyInLondon

Great, thank you both! I will look into the 0% money transfer cards

13thlegion

Does the loan allow overpayments? This is another way to reduce the amount of interest and pay it off earlier.

EmilyInLondon

13thlegion said:

Does the loan allow overpayments? This is another way to reduce the amount of interest and pay it off earlier.

Thank you for this idea too, I'll look into it! ☺️

easyasonetwothree

I would keep out of your overdraft, it's definitely more expensive and it doesn't look good on your credit report if you're using your overdraft regularly. 

I would echo the comments above regarding Money Transfer cards if you can get them, or over pay your loan as much as you can if Sainsbury's allows it. Keep up the great work!

DisabledDan

EmilyInLondon said:

Great, thank you both! I will look into the 0% money transfer cards

The advice given by Fatbelly is the best way to go but there are other considerations. 

Pay off the overdraft and do not spend any more with that bank, if you don't take my advice below then cancel that overdraft, at that rate they are not your friend.

Put your £1000 towards your "investment fund".

Next take up one of the MSE bank transfer deals that pay around £175 but as much as £500 only if you need insurance, .look at the deals that fit what you actually need and scroll down the link below for longer term deals. You use whatever bonus they give you and add it to your investment fund.  

moneysavingexpert.com/banking/compare-best-bank-accounts/

If the personal loan gives no discount for early settlement then it makes no sense to settle it now as you will pay the same interest, check with the lender for a redemption figure. In my experience they rarely give enough, some give nothing.

What makes sense is to reduce your balance and show you can manage your money, this will give you a better credit score for the future and give you access to other credit products.  What I am suggesting is you use all the money you can get access to to offset the interest you can't avoid paying.

So if the early repayment does not offer substantial discount then you keep paying the Sainsburys loan off in accordance with the terms.

Then take the take out any MSE recommended credit product you can find for zero percent 

moneysavingexpert.com/credit-cards/best-0-credit-cards/

but pay that amount into one of the MSE recommended savings products, some last as long as 21 months, you have just paid off the overdraft so in a month your credit score will already start to improve.  

moneysavingexpert.com/latesttip/#savings

You will need to see what you can get, using the MSE links on that page 

This is about self discipline,if you can borrow £3000 and add the £1000 you have from selling your car and the £200 you got for switching account, that gives you a healthy amount to earn up to 7% on. 

Also consider the costs you will no longer have because you got rid of the car, for example Insurance premium, Breakdown, car tax, all of that money can be used to reduce the balance of the zero percent card.

In 18 months the Sainsburys consolidation loan will be paid off, you will have been  and in 21 months you can either pay off what is left on the the zero percent card or Balance Transfer it to another 0% card and look for a better product to earn interest.  It might be an ISA or whatever.

You will technically be debt free once the consolidation loan is paid off, the zero percent is offset against investments, if you had any emergency like lose your job, you could cash out the investment and pay off the 0% balance.  

I have family and friends who use these zero percent cards to offset MSE deals, one has done so many balance transfers that the total credit they have is £125k, with around £40 of actual debt matched with £40k of easy access investments.  They have an emergency fund and a mortgage deposit saving fund.  Their employer went bust but was taken over, during that period there was great uncertainty, but they had self discipline and paid off the back to back 0% card by cashing out some of their investments, they also lowered their outgoings.  As it happened they got taken over and got their bonuses and so did a rinse and repeat.

Your situation must have felt awful especially if it was your ex as you would have felt out of control, (been there done that) but if you ever want a mortgage you will need a good credit record that shows you can manage debt and paying it off 2 months before an application shows you had control the whole time.

kimwp

Ooh yes, good shout on current account switching rewards. You can switch your current account now that you are no longer in the overdraft and get £200 (I think). Check out the mse switching page. If you open other current accounts, and change a couple of direct debits to be paid from them, you can switch those into other banks and get more switching rewards. A caveat is that opening current accounts might affect your credit record now as they do more checks (and obviously say no to any overdrafts) - so have a think about the order you want to apply to the money transfer card and current accounts in. If you get a no, then you probably need to wait a bit before applying for the next on the list. (Or possibly you want to apply for everything on the same day so your record isn't updated before the next application, I'm not too sure on this - but doing it in the order of most desirable still applies.)