To pay off short term loan, or part of mortgage?

[whomoon]

I have a £8k loan with 3.3% interest over 4 years, paying about £160 per month.
I also borrowed a little more on my mortgage a few years ago which is currently at circa £8k with a 1.6% interest rate and 22 years left on my overall mortgage term. Paying about £40 per month, with interest of circa £10 added back on each month.

I was recently gifted £7k by a family member of which I will spend a bit now and put the rest in savings, but the money I usually have left over of my salary each month, about £300, I want to start paying off either my loan or part of my mortgage.

But I don’t know which?

I have budgeted already to pay of my £8k short term loan, so I’m not desperate to pay that off. But I’m also conscious of reducing my overall debt.

What would you recommend is better to concentrate paying off first?

Thank you for your advice.

I'm no expert, but your loan has a higher interest rate and will cost you more so get rid of that first. The £160 you save a month from not paying that can then go to over pay your mortgage and reduce the term.

Also, don't put anything in savings when you have a debt. You'll get next to nothing in interest on it so pay off that loan first.

Martin Lewis has great advice on his website.

Pay off the higher rate loan. Use the payment amount per month ie the £160 to over pay the mortgage.

However do check whether there is any penalty interest is paying off the short term loan.

I'd definitely pay off the loan first.

Do you already have some savings? You mention having 300/month left.
If you already have some savings, I'd pay off the loan. Then split the 300 plus loan repayment in two. Half to savings. Half to additional mortgage.
Always assuming there are no overpayment or eary redemption charges associated with ether loan.

Is it actually possible to make overpayments to the loan without paying it off completely?

Yes do you have any additional savings? Any penalty/charge for paying the loan off early? Hows your credit rating, in an emergency would you have easy access to a 0% credit card or similar or are you in the kind of situation where if car broke down/boiler went/white goods broke you would be needing to put that on expensive credit/overdraft?

Generally it's advised to pay off any expensive debt (ie your loan) first, then build an emergency pot of at least 3-6 months living expenses in easy access savings, then consider your pension situation/max out pensions, and only then consider paying off your mortgage or building other forms of savings. So personally I would either put all the £7k towards the loan, or keep a small amount (maybe £1k) back for emergencies, this way with the budgeted £160 and your £300 available for savings you should have it paid off fully within 4 -5 months. Then after that I would put all the £460 now available into building your emergency pot, then after that consider whether overpaying the mortgage is the best route or possibly given it's so low cost you'd be better off investing it in an ISA or making additional contributions to your pension or similar...

Thanks for your suggestions! I do have savings, not loads but a few thousand, so enough for emergencies and to cover unexpected costs.

On the basis of everyone’s suggestions, focusing on paying off the loan seems to be the best option. It was actually what I had planned to do, but a friend of mine said why not enjoy the cash and upgrade house etc, or pay off some of the mortgage. So I wondered what the benefits could be paying more of the mortgage off, but I totally agree it’s the short term debt that should be cleared first.

There is no penalty to pay it off sooner either, so I’ll keep chipping away at it and it will soon be cleared.

Thanks again!

Just pay off the loan. I wouldn't bother spending any on anything unnecessary to be honest!

@sweepeep

Just pay off the loan. I wouldn't bother spending any on anything unnecessary to be honest!

Agreed! We’ve booked a small holiday, but I don’t need the money for anything else, so will focus on clearing the loan. I hate having debt hanging over me, and only had the loan to buy a car, otherwise it wouldn’t even exist! I’m not one for buying stuff for the sake