Take out a loan to pay off another

[lauraflower15456]

I took out a loan about 18 months ago to carry out some essential home improvements. However, this was when rates were high and the rate is 8.9% around £310pm.

I have had a look at ways to reduce the monthly rate as this has become unaffordable overtime due to having a child and returning to work on reduced hours.

Ideally I'd like to transfer the remaining loan amount approx 11k to an interest free credit card but I am not being offered a credit limit that high despite having excellent credit score.

My other thought was to look at taking out another loan on a lower rate, around 6.1% approx £200pm and using the money to pay back the higher loan, saving myself £100pm.

Is this a done thing? Can anyone suggest any other option to reduce amount per month? Paying an large amount off the loan early isn't an option at this point.

You could approach the lender to ask to extend the term of the loan you have? This would cost you more in the long run in interest but would decrease the monthly payments for now.

You could take out another loan to repay the original loan but have you checked to see if you are able to repay the original loan like that without incurring extra costs?

In theory, what you propose works if they're both fixed interest rates. But your credit record is going to show you in debt to the sum of both loans and your total loan repayments will now be £510 per month (not £200/month). These are the numbers that any lender or finance institution is going to look at to assess affordability if you're needs change again in the future.

To get the short-term be benefit for the duration of the first loan you would have to be:

• Extremely disciplined that you wouldn't dip into the balance of the second loan and would leave it untouched in a savings account, only drawing down repayments for the first loan. Not even touching the interest.
• Certain that your financial future is stable and that you're not going to have any unexpected financial emergencies or changes in financial circumstance.

If you dip into the second loan even once, or if you have any other unexpected essential improvements to make, then you're scuppered and potentially a lot worse off.

And just to repeat the important bit:
Your total loan repayments will now be £510 per month.

I think what OP means is taking out a second loan to repay the first loan in full, and then just make the monthly payments on the second loan. So the only monthly payment would be the second loan.

Why would her total loan repayments be £510 when she's using the second loan to clear the first one?

In that case there are almost certainly penalty fees - lenders make money on the interest, so you're taking out an even bigger second loan to cover the first plus the repayment penalty.

Yeah this is what I & another questioned earlier, whether OP has checked to see what fees there may be for repaying the original loan in full as I totally agree, with a loan of 11k over I assume a few years it’s unlikely that it will be possible to just repay it without any penalty. As you say, this is how they make their money.

It’s called a consolidation loan and if the new interest rate is much lower then it might be a good idea. Calculate how much you will pay from now until the end of the original loan ( include any penalty) and compare that with the total amount payable on the new loan. If it’s cheaper definitely do it

My rough calculations put the original loan at £15k over 5 years.

Thanks for all of your replies.

I have already retrieved an early repayment quote from the original loan lender, circa 11k, which is what I would borrow from a second loan to pay this off and reduce my monthly payments.

You'd have to check your original loan agreement to know if they have an early repayment charge. Lenders can charge up to 2 months' additional interest if you choose to repay early. Sometimes you can avoid this by not clearing the full loan in one go, but almost the full amount so that you still have one more months' payment left. Then you are not paying the loan off early, just making a large overpayment, which doesn't trigger the extra interest charge. Then you would pay off the final amount the next month as usual.

If you can get any interest free credit card offer at all, then it would probably work out cheaper to pay off what you can on a 0% card and then take out the second loan for the remainder. But I would only use an existing card to do this, as you don't want multiple hard searches on your credit file.

I've done this before

Pretend figures but took a loan out for £10k at 8%. Costing £300

Paid off 1 so owe £9k

Took our loan for 9k at 6% costing £260

Paid off first loan so reducing monthly payment by 40

Credit file showed 2 loans then month and my number dipped a bit as looked like I owed £19k

later it showed one and £9k

Not sure why a poster says uou will be paying both loans so £500 +

As long as you pay off the first loan. Usually 2mths interest added

What makes you think you will get a loan for a lower interest rate than you have now?

I don't, I have looked on my Experian and have pre-approved loans displaying when I do a search for the amount I would like to borrow.

How much can you get on an interest free credit card? Even if you can't get enough to cover the full amount, if you could clear say £5k like that and then the remaining £6k on a lower interest loan, at least you'd only be paying interest on part of the money, not on all of it.

Exactly, this is the most favourable option I believe.

I find banks i bank with give me lower rates so NatWest and nationwide were lower then others

Also interest rates were higher when I did this

Was sometimes last year I swapped loan for loan