Is it wise to take a loan out at 5.7% to pay off debts?

IAMIAM

I have been offered a rate of 5.7 with HSBC on amounts up to 20k.

I am tempted to take out one for 15k to essentially pay for my PCP….

I have Zopa loan, 10k, 9.9%, 3 years left, I am paying interest of £75 a month and will have to pay £9k in balloon in 2027, I will be keeping the car.

The other 5k is for my maintenance plan and £3k in credit card.

I was going to take one out for 15k, 2 years, payments around £650 a month. Is that too much of a stretch?

Emmia

https://forums.moneysavingexpert.com/discussion/6666293/is-it-wise-to-take-a-loan-out-at-5-7-to-pay-off-debts

I think you need to have a good hard look at your finances - consolidation is rarely a good idea, it's a quick way to double your indebtedness.

Smudgeismydog

Consolidation might seem like a way out, but we see posters time and time again back here with more debt afterwards, it rarely works.

As @Emmia notes, often it ends up as more debt as the real issues of why you found yourself in debt in the first place are not addressed.

Complete an honest SOA based on the last few months bank statements and post back.

Exodi

From a strictly mathematical perspective, yes a lower interest rate means less interest than a higher one.

Your post is quite light on details however, so I'm not completely clear on the plan -

You currently have a Zopa Loan for £10k (I presume that's the PCP) with a £9k balloon in 2027?

You also have a maintenance plan for £5k, and £3k in credit card debt?

Do you have any other debt? It would be much more useful if you provided a full statement of affairs, detailing the rates, the balances and the terms.

You intend to borrow £15k to pay off the £10k PCP loan (but not the £9k balloon payment, would the idea be to save for that over the next year? It's a lot of money to save in a year) and the £5k maintenance plan? What is the interest rate on your credit card? If it's not 0%, many credit cards are around the ~30% APR mark.

While consolidation loans make sense in theory, they very rarely work in practice, as they don't address the reason someone got into debt in the first place.

As a layperson, you agreed to spending £24k (+ several grand in interest) for the purchase of a new car. Given this was all taken on interest-attracting debt, some might think this was perhaps not the wisest financial decision. Certainly more expensive than either of the cars my wife and I own, and we bought them in cash. A plan to reduce debt has to address spending else you'll be in an endless loop.

I fear there has not yet been the lightbulb moment, as you are steadfast in saying "I will be keeping the car.". Personally I would have at least considered VT, or not paying the balloon payment and looking at much cheaper car options after the PCP, or (if it makes sense) paying the balloon payment if you're able to sell the car on for a profit.

All paying off debt with debt does is gives people a false comfort that the situation has been resolved, and as the others above have said, we have seen countless people returning to this forum after they have spent the breathing room a consolidation loan gave them and they're in more debt than they were before.

MasterG83

Agree with most of the above posts, by consolidating you are basically kicking the can down the road, this isnt dealing with the fact you have an uncomfortable PCP.

I would be inclined to look at VT or at least changing into something more in keeping with your current state of finances, IE, save and buy a cheap car cash, start clearing your debt.

fatbelly

It's an impossible question to answer on the info provided. Yes, 5.7% is a good apr but can you afford the instalments? How would we know?

VAP_Driver

I know you know this, and I know it’s obvious. But taking out a loan to pay off debt isn’t paying off debt. It’s just changing who, and possibly how, you pay it.

The reason I say this is because it’s very tempting (and I know this because I’ve convinced myself of it several times over the years) to then think you have significantly improved your position, especially if your monthly payment has decreased. But it hasn’t. In fact, you may be worse off if you’ve extended the overall payment terms, even with a lower interest rate.

I’m not trying to say consolidation or restructuring is always wrong. But it’s important that it’s done for the right reasons. And that the decision is based on a dispassionate consideration of the facts and consequences. Which is actually really hard to do when it comes to debt.

sourcrates

I`ll go one step further and say that a lot of ex bankrupts/insolvents etc, all went down the consolidation route at least once, most more than once, before they declared bankruptcy or went insolvent.

It appears to be a natural step to take when you have been so used to borrowing your way out of trouble in the past, you get sucked into that "credit is king" mindset, and that only the banks can help you, that it will reduce your monthly outgoings, and you will never get into this situation again.

Well for most people that`s just not the case, the increase in disposable income ends up going back on the credit cards you recently consolidated, "oh its just the once" you say, and you convince yourself you will pay it off in full, but you never do, and before long that credit card is maxed out again, along with 3 more you convinced yourself you would never borrow on again, its a slippery slope that many people just can`t help but slide down.

Only those who are super careful with their money can make consolidation loans work, most people who have had a lifetime playing the credit game, do not fit that bill unfortunately, so I have to say its a really bad idea for the majority of folk out there.

They would be better off exploring debt solutions actually designed to get you out of debt, not to keep you in it.

burgervanman

Regarding the car, VT, assuming you've paid at least 50% and the car is in good nick is a sensible option for PCP if too high.

I've done this twice in the past, once for your reasons and the other as I just wanted a new car and the part ex deal was rubbish compared to a fresh deal.

Finance companies dont like it but it has zero affect on credit ratings and alot of dealers recommend it if your trade in options aren't great.

Just make sure you check this manual before considering

https://www.leasingoptions.co.uk/car-leasing/guides/bvrla-fair-wear-and-tear

If the car passes your own idea of the above guide, the process was simple for me with Fiat, just sorted with their finance, drove car to the nearest of their choices (to avoid collection bill), the guys inspected it and then I got a taxi home. Month later, all closed and credit rating intact.

Oh and unless you have an iron will, once you get consolidation, you'll see the cards with zero balance and be tempted again. Dont! been there…. :D

IAMIAM

My PCP currently consists of a Balloon of £9750 and I am paying £75 a month interest payment until Summer 2029. So in effect £3500 in interest. I have already paid as much as I can onto the PCP, I have to keep £75 interest payment on the 9750 balloon. The 3k is a maintenance plan I ma paying monthly for (4 Services, 4 MOTs, 4 Seasonal Health Checks, Breakdown and Warranty).

I am ultimately going to take a a loan of 15k over 2 years to pay all this off?

Exodi

IAMIAM

My PCP currently consists of a Balloon of £9750 and I am paying £75 a month interest payment until Summer 2029. So in effect £3500 in interest. I have already paid as much as I can onto the PCP, I have to keep £75 interest payment on the 9750 balloon. The 3k is a maintenance plan I ma paying monthly for (4 Services, 4 MOTs, 4 Seasonal Health Checks, Breakdown and Warranty).

I am ultimately going to take a a loan of 15k over 2 years to pay all this off?

It's unfortunate you haven't responded to any of the advice people have offered you.

It's a lot of money being spent on a PCP, and all on credit. Are you not concerned about any of those numbers?

As you end your post with reiterating the same statement as your OP (though confusingly end it in a question mark), I wonder what you wanted from this thread. Unfortunately no-one can offer you the reassurance you might have sought.

I think @sourcrates puts it perfectly "Only those who are super careful with their money can make consolidation loans work, most people who have had a lifetime playing the credit game, do not fit that bill unfortunately, so I have to say its a really bad idea for the majority of folk out there."

I'd tend to agree and I fear that someone that has the propensity to borrow £25k to purchase a new car at relatively high interest probably falls into the latter camp.

If you are you going to take out the consolidation loan regardless, and it's just a question of whether it fit your budget, then you will need to provide details of your earnings, outgoings, other debts, etc.

Typically this is done by filling out a statement of affairs and copying it to this thread:

https://www.lemonfool.co.uk/financecalculators/soa.php