Help me make a financial decision. Should I take this loan?

[MoneyManager]

I have a poor/fair credit rating. I’ve always found it difficult to manage money (I was diagnosed with ADHD late teens) and due to circumstances which left me homeless in my teens, I become extremely anxious if I have no emergency access to funds.

Over recent years, I’ve worked hard to build up my credit rating and I’ve not missed a payment in over 3 years. I’m now starting to get offers via my bank for loans and overdrafts.

I have a credit card with a £5k balance on it; it’s a high interest credit builder card and I’m paying £200 per month in interest alone. I pay the minimum payment each month but realistically the card won’t be paid off for a long time as the interest is high.

The repayment for the loan I’ve been offered is £267 per month for a loan of £10,000 over 5 years.

I am considering taking it with the idea that I pay off the credit card, cut it up and remove it from my phone (but keep it for serious emergencies eg: if I needed to replace my car and couldn’t finance it any other way).

I would then use the remainder of the loan to :

Start a savings pot (£2000)
Pay some small miscellaneous bills (not household)
Buy some furniture I need.
Pay off a smaller credit card (£1200)
Book a small trip (circa £300)

If I take the loan, I’ll break even each month when I consider the repayment on the credit cards I’m already paying vs the new repayment of the loan, but it will be beneficial in terms of having savings and paying off a high interest card.

Because it won’t save me much money each month, I can’t work out if it’s worth it or if I’ll just end up worse off?

I can easily afford the repayment, especially as I would no longer be paying the interest or minimum payment on the credit card. I’d also ensure I have some savings out of it to cover the repayments if needed (but I don’t envisage this happening).

Thoughts?

Take the loan but just for the £5k.

All this does is turn £5k debt into £10k debt.

If you’re going to take out a loan, get a £5k one and pay off the debt - for presumably more like ~£130
a month.

Have you explore transferring some of that debt to interest free cards for a bit, that could give you some time.

Or - aggressively pay down that loan, you say you can easily afford the repayments on the £10k loan so… why not focus that spare cash on paying off your existing debt..?

Take a 5k loan to reduce interest on the original debt.
Under no circs take out more debt.

The Trip you dont need....
For Furniture get on free cycle and olio....

No, don't do that. You are simply doubling your loan from £5k to £10k. If you must, then take out a loan for the £5k you owe on the card and pay that off in full. I am assuming the interest rate on the loan would be far less than the current interest rate on the card. The loan repayments will then be far more manageable and you won't have increased your overall debt. You will also be paying back less each month, and the difference in repayments can be put into savings.

No. You are currently £5000 in debt and are barely servicing the loan. Why would you want to double your debt, increase your monthly payments and waste spend the other £5000 on things you can do without! Use the extra £67 a month to start to slowly pay off the cc , or the other mysterious £1200 cc that has appeared from nowhere.

And get rid of the high interest credit card altogether. I've just noticed you also have another credit card with a smaller balance. Use every penny you can to bring the balance on that one under control before you do anything else.

Agree with other posters, it would be madness to take out a £10,000 loan. Is the 1,200 loan high interest too?

Take the loan but ONLY for the £5k.

Your plan would just literally double your debt, which is madness.

As others have said. Borrow the £5 k only. Borrowing £10k as you describe is a recipe for absolute disaster. You will use the credit card. It’s too easy not to.

Forget about regular savings until you are debt free. The interest you will earn is a tiny fraction of interest paid on debt. Especially credit card debt.

Credit cards are a very dangerous and expensive way to borrow. And for someone not good with money. Avoid avoid avoid

Stupidly, I never considered taking the loan for only the card debt, that would reduce my payments and improve my rating with the paid off card.

I make very rash decisions so it helps to hear other thoughts.

Another consideration is that I may have to move soon and the additional funds would help with moving costs. If I take the lower amount, I wouldn’t be able to get another loan and I certainly wouldn’t want to use the card I’ve just paid off. I do need to seriously think whether it will be worth it.

These posts have made me think twice, thank you.

Good you are taking it onboard!!!

but I would aim to keep the repayments the SAME as they are currently (eg. Keep at 350 pm rather than drop to 250) this will reduce the interest paid overall and get you out of debt faster.

Balance transfer to another credit card with 0% interest so that you are paying £200 per month off the balance and it isn't just going on interest.
£200 monthly is a ridiculous amount to be paying just on interest for a credit card.

Why not get a 0% credit card instead and pay it off as soon as possible

I wouldn’t qualify for a 0% card due to my current rating, at least not at the balance I have. I do need to get rid of the card ASAP. A pp is right that it’s too tempting to use again, especially as I really struggle with financial decisions to start with. I will pay it off and close the account .

Usually fair/poor credit makes one ineligible for 0% offers.
I am sure OP would have done this if they could.

Ah, OK I see. @MoneyManager get the loan then and use itvery carefully since you will be paying the same amount you are paying now.

Any amount of your debt you can transfer to interest free will save you money. You can transfer part of your credit card balance to a zero interest card, doesn't need to be all of it. Look at the money saving expert website for best deals for poor credit history.

It is rarely a good idea to pay one debt off with another. How did the cc debt come about, have you addressed the spending behind it? Would you be able to sustain the payments longer term. Maybe get support with budgeting before committing to anything, CAB might be a good place to start.

I’ve checked my statement for the card. The minimum payment is £250; I then have an extra payment of £150 meaning the total on that card alone is £400 per month.

The £1200 card was for a recent emergency car repair (I rely on my car). I have been paying that at £100 per month. So in total I’m paying £500 per month in payments. The loan would reduced this to around £200 (at a guess) if I take enough to pay both cards off. This would save me £300 per month.

Would it make more sense to do this?

You really need to be looking at the total figures, not how much you’d save per month because that is irrelevant really in the grand scheme of things.

For example £500 a month for 2 years is £12,500, £300 a month for 5 years is £18,000 so you’d be long term much much worse off.

You need to look at the TOTAL cost of the loan, plus the interest and the total cost of the cards plus the interest- and no adding to the debt from today.

The debt came about due to frivolous spending in my late teens, a short period of homelessness, moving costs when I found a home, I then hoarded food by stocking up on things and it spiralled. I then became increasingly anxious at not having access to emergency funds.

I have improved my approach to spending and I’ve worked hard to build my rating again and I’m becoming more financially aware. I’ll never be perfect or rich but I do think twice before making a decision now. It’s still very difficult to get around the anxiety of not having access to savings but I am working on it.

I would take the £5k loan, pay off the more expensive card (presumably the £5k balance one? What are the interest rates?) then whatever the balance of the £500 debt repayment is each month that you ‘save’ because th repayments are less, you pay to the £1200 card.

For the love of God don’t take £10k and don’t borrow to have ‘savings’, that is madness.

You need to a) pay off your debt and b) improve your credit rating so that in a future emergency you’re eligible for much cheaper credit.

Look at the possibility of 0% credit in the future as a way of having something in the emergency pot and work towards that. Hopefully you can then build savings too.

Money Saving Expert is a great site with lots of helpful guides on it.

You need to take the minimum loan at the lowest rate for the shortest amount of time. It sounds like you need to borrow £6200 (assuming the APR on the loan is lower than the £1200 credit card). You are affording £500/month so should be able to pay it off in a little over a year. You can then put £500/month into savings for an emergency fund a when you have that you can buy furniture and go on holidays

Check the interest rates & early repayment terms. Often you get better rates for loans over £7.5k vs £5k - Martin Lewis has articles on it.
But yes, there seems to be some sense in consolidating your debt if the interest rate on the loan is less than the CC.

Regarding your credit card - freeze it. Literally, put it in a tub of water & put it in your freezer. You’ll have time whilst defrosting it to think about whether the purchase is really necessary.