which debt is better to pay off?

[PookieDo]

If you had 2 small debts of similar amounts (each under £2k) and some money available to pay it off, but it won’t cover both which one would you pay?

Options:
A - debt A is low-ish interest (5%) with 8 months left on it and costs approx £150 a month. Free to over pay (reducing your term) or pay off

B - debt B is a no interest for 20 months purchase credit card which you have been clearing in larger lumps

C - pay a portion off of both (but Which one gets the larger portion?)

Both debts were accumulated by a house move that I knew I could pay off this year. I have no more outlay so want to close the accounts when I am done so don’t need long term financial management

The one with the higher interest.

Pay off the debt with the interest, then transfer the repayment to the other debt to get it written off quickly.

A, obviously, it is costing you money.

Then use money left over and the money you 'save' by no longer having to pay A to pay B off. Once all paid off, start saving money rather than spending the money you aren't using to cover loans.

A.

Pay off the 5% then Start putting the monthly saving from that into the other one.

I am looking at A now and the interest has already been added on

My remaining balance to pay includes interest too and not much more than I would pay if I carried on with it

The loan was for £2051
I have paid £723 from it
Outstanding balance is £1398

B still has 20 months interest free and I can clear it off by then

That will be an outstanding balance on A - not a settlement figure - it should cost you less as a lump sum as some of the interest is credited back

Probably A, but it depends whether you will be able to pay B off in 20 months and what the interest rate would be after that.

You need to work out how much interest you would pay before the loan is paid off in full, for each one. But it's probably A.

A, so long as you are confident you can pay B within the interest-free period.

The advice you have been given so far is correct. Pay off A as it attracts 5% interest rather than the 0% credit card.

Your update isn't very meaningful. What are you saying - that you want to just carry on making the payments instead? You'll still be financially better off by paying off the £1,398 balance and then using any extra money to reduce your credit card balance.

Depends when the interest is added I guess. You are implying in your update that the interest was added when you took out the loan and won't change as long as you stick to the repayment plan? This would be a bit unusual I think - usually the interest would be added on each month depending on what is still owing?

clear the interest one, as long as you can clear the other one before it also runs out of time, and starts charging at maybe a higher rate.

another thought though. A 2K loan at 5% is only £100 interest. (Especially if 5% is APR and not flat rate - if it's flat rate the true rate is higher) - anyway the point is that you may be better not completely clearing it - and keeping some back as a rainy day fund.

The thing they always say about overpaying a mortgage to reduce the term comes with a caveat. You don't want to be too hard on yourself when you need the cash now, cause in 25 years time the mortgage won't seem so dear, and your wages will have gone up. Money in the hand now is worth more than money in the future.

Pay off the debt with the interest, then transfer the repayment to the other debt to get it written off quickly.

^ another vote for this

I would take the loan and switch it to a new no interest card and pay off the balance across the interest free period.

I think some charges and fees are added on so the £1389 is the final balance to pay not just the outstanding balance

I will pay A off and use the rest to pay some from B

Thanks all!

I’d pay Debt A in full, then use whatever is left as a lump sum payment on to Debt B then transfer the original monthly payment of £150 for Debt A onto Debt B and overpay.

I wouldn’t pay anything off B, just transfer A’s payments to it.

What is the interest payable on B when it does kick in? If it's a credit card or store card that suddenly starts charging you 27%, how confident are you that you will have the cash available by then to pay it off in full before you pay any interest?

Pay off A and then use the £150 a month you were spending on clearing A on debt B instead. Debt B gets cleared faster hopefully still whilst interest free.

@palahvah

It is high once the term wears off yes!
I needed it as I didn’t have savings to buy furnishings and appliances all in one go, but I have income to pay it monthly for the foreseeable - I think that is why I hesitated though as the interest is high

Thanks all I am going to pay off A then pay some off B then clear it with A’s payments - I think I can do this in 5 months

I would calculate your monthly payments to pay off the credit card in the remaining interest free period. Then save the difference between your current debt repayments and what you need to pay off credit card. (Having already repaid A).

Then you have some savings for unexpected costs without needing a credit card again.