Trying to pay off debts

[RollerCola]

I'm getting in a bit of a mess & need a bit of advice. We've racked up approx 8k in credit cards & a loan over the last few years & need to try to clear at least some of it over the next year.

We were hoping to add it to the mortgage but we've been turned down so we've got to bite the bullet & try to pay it off by cutting back as much as we can.

My question is, how can you clear more expensive debt first when it is in the form of a loan? We have 4k outstanding on a loan with 4 yrs to run, and 4k on a credit card on which I have negotiated a zero interest rate deal for 12 months.

Obviously I can pay off as much of the card as possible which will clear that earlier than the loan but wouldn't it be better to clear the loan earlier as well? Can you overpay loans or do you have to just let them run?

The loan interest rate is 27% apr which is high so is it worth trying to get a loan with a lower rate & using it to clear the loan & reduce the monthly payments? Or could I even clear the loan with a cheaper credit card?

I'm confused as to how to get the cheapest deal & in which order to pay it all off.

It certainly makes sense to pay as much as you can off a loan costing you 27% APR. Check the terms of your loan and talk to the lender about overpayments. If you can make overpayments, it may be also possible to pay it off by taking out a cheaper loan.... assuming that you are not turned down the way you were with the mortgage. However, do also be aware of the APR of your 0% credit card once the special rate expires. They tend to be very expensive.

Obviously, don't take on any extra credit or use credit cards once you embark on this. Consolidating loans becomes very dangerous if you do that.

Finally, have you thought about talking to one of the free debt advisory services such as CAB, CCCS or National Debtline?

Some loans can only be repaid in full and incur an extra fee for paying back early, so read the terms of the loan and ask the lender. Once you know the situation you can the decide what to do.

You may find that the loan will have to be kept running, so then you would payback the credit card first, then save money to pay off the loan.

The 27% loan-have you asked for a settlement figure on that of you were to pay it off early? Settlement figures are usually less(unless its hp).

Normally I would say pay the smallest debts off first. But this 27% one is a bit of a killer.

You also need to bear in mind if you keep applying for credit it will show on your file and creditors will be more reluctant to lend to you as it looks like you're in financial trouble iyswim.

I also wouldn't go with a debt repayment agency as you have to pay them a % which, effectively, you could be using to pay off your debt.

Have you spoken to the lender and asked if they can reduce the apr or settle on a repayment plan for you. If you give them an income and expenditure record they may be more open to negotiation.

Thanks for the replies. It's a LTSB loan & I believe that overpayments can be made quite easily.

I guess what I need to know is, should I overpay as much as I canon the loan now, keeping the repayments on the 0% interest to the minimum while there's no interest. Then switching the overpayments to the card once it starts charging interest again.

Or the other way round - carry on paying the normal loan payments but pay as much as I can afford off the 0% card now to clear it. Then concentrate on the loan.

How can I work out which will save the most money?

Without knowing full details of the loan it may be impossible to know.

Whilst you think you can make overpayments on the loan, what is the affect of those over payments? They may reduce the outstanding balance but is the interest calculated daily on the balance, or is it fixed in some way?

Don't know if MSE loans calculator is of any help.

I would say it's best to pay off the most expensive debt first, so that is the debt which will cost you more - the one with the higher apr usually. However if a penalty charge applies to overpaying/paying all of the loan off early, then it may not be the best thing until that penalty charge is very small.

The 0% interest card will stop being 0% at some point. When it does the cost of that debt may be quite a lot... interest calculated from the transaction date, not the date the 0% runs out.

If it were me, I would pay off the loan, then the card. As the loan APR seems high, the card may be changed for another one, or one with an APR lower than the loan apr ... my credit card charges 16.9% for most types of transactions (higher APR for some things like Cash Advances). Looking at my card terms&conditions, when 0% period runs out, then usual rate applies and interest is charged from the date the transaction occurs. So I would presume by that they mean that it gets calculated daily from the time the transaction happens, even in 0% time. Make sure you pay the Minimum Payment each month, otherwise you will probably lose the 0% deal.

Maybe pay something off both each month, that may improve your credit rating by showing that you are making more than the minimum payment, thus meaning you can then get another 0% card or a low percent card, or at least a little over minimum payment so you start to reduce the balance. CardTart can remind you of when to make the switch to another card, as what you don't want to happen is that the 0% ends and you still have the card... as then all the interest gets added.

Find out full details about the loan. Consider if you will repay the card off quickly or if you would be needing another 0% card.

Ok. Normally I would say pay the smallest debt off first.

So if you had£100 a month to pay debts. For example, £50 on the smallest, £30 on the next, £20 on the smallest.

You'd pay the smallest off quickest so you'd stop paying interest on that. So then you put that £50 on the second biggest and get that cleared. And so on.

The quicker you get rid of a debt the quicker you ferris of the interest. Smallest first.

Thanks, I've just found something called a Snowball Debt calculator which lets you key in your different debts & rates & tells you in which order to pay them off - very helpful!

I need to find out whether there are any penalties for overpaying the loan, if not I'm going to clear that first. It seems to make sense - I could probably clear it in 1 year instead of 4.