A quick query about a loan

LzzyIsGod

Just hopping over from my DF diary with a quick query for the very knowledgeable people over on this part of the board.

I'm plodding along working on paying off my debt, one of which is a loan with APR of 12.3% (interest is added monthly). I am meeting payments and have not missed one ever. Current term in 46 months to go (which ideally I'd want to reduce)

 I know consolidating loans are a very bad idea and generally not recommended but i wondering if in this circumstance it was worth looking for an alternative loan with a lower APR for the same (or less) duration of time and amount or whether it's best to just leave well alone. There is an option to over pay on my current one if I wished and I have no desire to increase the amount owed (I want it to go down!!)

 I would be grateful for your thoughts.as sometimes i have marvellously ridiculous ideas but in my head this is  more negotiating the interest rather than consolidating debts.

fatbelly

12.3% isn't particularly high for a small loan that you can overpay.

What are the aprs on your other debts?

LzzyIsGod

fatbelly said:

12.3% isn't particularly high for a small loan that you can overpay.

What are the aprs on your other debts?

Thanks for the reply @fatbelly

Everything else is on 0% ccs which I manage like a hawk in terms of 0% terms ending. 

 Loan amount is currently £15 141 so interest is about £160ish  a month at the moment  with 46 months to go

ManyWays

How large are the cards at 0% and when do the offers end? 
Do you have a mortgage fix ending soon, at that point will your mortgage payments go up or down?

LzzyIsGod

ManyWays said:

How large are the cards at 0% and when do the offers end? 
Do you have a mortgage fix ending soon, at that point will your mortgage payments go up or down?

£814  end May 26
£7168.70 end March 26
£3818.67 end May 27
£8547.00 ends Nov 26
Loan is £417 a month
Overall I am paying around £840 towards the debt  plus saving around £450 a month

Mortgage has recently come down slightly. I have a complicated arrangement with some inheritance that's tied into a separate property that will clear my own mortgage (when the time comes). I also have a personal  EF of £1700 and savings in trust funds of approx £17.5k (although these vary depending on markets) and then some small joint savings with my partner. 

LzzyIsGod

Just reading that back and I guess the question is why don't I use some of the money I have towards the debt.

A few reasons - one being my car will give up the ghost imminently and I will need a new (to me) one, 1 policy has a critical illness element to it (separate to my income protection policy) so I'm reluctant to touch it unless absolutely necessary and those are my Total Diaster Funds I guess.

But most importantly I got into my current mess by not budgeting and not living within that budget. What I've learnt over the last 6 months of my diary is how to purposefully save, budget and spend and whilst I'm not 100% there yet I am better now at living within my means after years and years of significantly overspending.

ManyWays

"trust funds" is this a type of investment, or is it money held on trust for you that you need someone elses permission to access?

You are saving £450 a month, why, when you are paying 12.3% interest on this loan? 

LzzyIsGod

Ah this is where my financial illiteracy kicks in.

 I have some (very old) Unit trusts and an investment policy - the unit trusts were set up as a child but I have control of them. The investment policy I've had 25 years.  To be totally honest until my LBM and i started going through everything I had totally forgotten I had these (thats how unaware i was). 

The 450 goes towards saving for holiday, unexpected car repairs (these have increased recently) and unexpected outgoings/emergency fund thats easily accessible. Anything else leftover at the end of the month goes towards the CCs.

ManyWays

OK I think you should find out what this investment policy is and how you cash it in. They are often not very good investments at all. Find out exactly what the cover is, don't assume it is adequate. 

This is a lot of money that is unlikely to be growing at a rate faster than the interest you are paying on the loan...

If the UTs are not in an ISA (or other tax shelter) then you could perhaps have a program of selling enough of them each year to use up your Capital gains tax allowance of £3000 a year. The money can then clear the loan, or cards, or go into an ISA and be invested there and be tax free. This could take several years, but that is a reason to start now, not think of it as "too difficult". If you wait for a "disaster" then you may face a high CGT bill that year

enthusiasticsaver

I think if the investments are not providing a return of 12% (unlikely) and are accessible you would do better cashing them in and repaying the loan.  I do  get saving for things like holidays but you have a fair amount of credit card debt too.  I think it unlikely you will get much better than 12% with the amount of other debt you have.  When credit scoring any new application will not assume you will be repaying the current £15k loan off so they will score you as carrying £20k of credit card debt, £15k on your current loan and £15k on a new loan.  

The reason consolidation is not advised is because it usually tricks people into thinking they are dealing with debt when really they are shuffling it around. £840 towards £35k is going to mean you have the debt on your back for the next 5 years probably so I would be looking to make economies elsewhere to up the monthly repayments or cash in those investments. 

Exodi

Unfortunately I don't think you've yet had your light bulb moment as it is incomprehensible to me that you would be carrying around £20.5k on credit cards as well as a loan of £15k, and decide to put your £450 spare a month towards saving for a holiday and earmarking your savings for a new car...

It is extremely unlikely any investments/savings you hold will beat the 12.3% you're paying on the loan, which will work out to over £4k in interest you will pay towards it from now over the remaining term.

Likewise, you have quite sizable credit card balances currently on 0% deals that expire within the next 1-2 years, but no real plan for them.

You're fortunate in a sense that your inheritance will likely clear your mortgage.

Personally, if it was me, I'd find a way to access the £17.5k invested you have immediately and pay off the loan ASAP. I'd then put the remaining ~£2.5k into emergency savings for now. I'd start working out a savings plan to tackle the credit cards that will come home to roost in the near future, which means not going on holidays or buying a car for a couple of years, but putting the £450 you currently save and the £417 you no longer need to pay towards the loan into regular savers or something with a decent interest rate.

When I modeled this in a repayment spreadsheet, you will find you are effectively able to clear all of the CC's as they become due, and be debt free in May 27, which I think would be incredible.

But as I said earlier, unfortunately I don't think you're taking it seriously enough, and the 0% CC offers are probably causing you to be more relaxed than you perhaps should. This is the crux of why people on this forum tend to not recommend consolidation loans - it's not that a lower interest rate is not good (it obviously is), it's because it commonly leads people into becoming too relaxed and spending again.

Paying off the debt doesn't solve the problem, addressing the cause (e.g. why it happened) does.