Approach to clearing debts

[glamourousindierockandroll]

I'm feeling motivated after clearing a loan today. I've had a promotion, so want to use as much money as I can to pay down old debts in order to start saving.

My tactic so far has been to save the money in a seperate pot and then I've got a resettlement fee and cleared the balance today.

My next one to target is my car finance which is a balance of around £2000 6.7%apr. I'd like to try and clear this by Christmas.

Should I continue to save the balance myself and then clear it, or make regular overpayments? Does it make a difference?

Make regular overpayments.

I'd recommend paying the items that have the highest interest first.

Once you no longer owe them the money they can't charge you interest on it (assuming no early repayment penalties like a mortgage). So for a car loan of 2k at 6.7% by Christmas that's only about £40-50 difference but on higher APR or over a longer time it's more money.

Thanks @Augend23 . This is the only debt I have other than the mortgage and a 0% credit card which I'll get rid of after the car finance.

I'll have about £800 by the end of this month in the pot, so in your opinion I should pay that towards the car as a lump sum and then overpay what I can each month, rather than build up the total amount in my own bank account and pay it off as soon as I have the balance?

Well, that would be my preference because I would enjoy seeing the balance go down and it would save money.

If the net motivation for you will be the same then I would pay it down a chunk at a time.

But maybe for you the motivation of being able to see the money pile up and then pay it off in one fell swoop is worth the £50 it will cost you - if it means you save harder it might be.

If you pay off debt regularly, you reduce the effects of compound interest ( interest being charged on interest already accrued).

If you're allowed to overpay the car loan, do that. You currently can't get 6.7% interest from any savings account so this is the comparison you need to do.

Providing that it is allowed, any money you pay towards the car loan immediately reduces the balance and hence interest charged.

Do you have a small emergency fund? I have read the book ‘meaningful money’ and it suggests:

1. build up ‘starter emergency fund’ depends on your income but could be circa £1k (this cushions you from needing to go back into debt for car breakdown etc).
2. Pay off ‘bad debt’ (credit cards / non student loans) highest interest 1st
3. build bigger emergency fund
4. invest

This has really helped me focus as it can all be so overwhelming!

good luck x

If you only have the 2k finance car debt not sure if this an option but could you look to take out a money transfer credit card for 2k, the 2k gets paid to your current account which you then pay off the car loan. The card would be 0% for 18 months so you could pay it off but the cost something like 3% fee. It would save you paying interest on the car loan of 6.7%.