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?

Why haven’t you moved to an interest free balance transfer card? That would be the most sensible solution?

This isn’t necessarily the best ‘advice’. If extending the term keeps the compulsory payments lower, and overpayment is permitted without incurring fees, a longer term could protect OP from unexpectedly expensive months. The worst thing would be to default on a payment.

I think you need someone to look at all your finances with you because you clearly have a long history of poor choices with money but are now sorting them out, so well done for tackling the issue. Have you heard of Stepchange? I don’t know if they would be able to help but if they can help you you will know that the advice they give is the best advice to cover your particular situation, income, outgoings, debts etc.

Don't EVER borrow money with a view to putting some of it aside as savings

You will ALWAYS pay a higher rate of interest on borrowing than you'll get on your savings, so that part of your plan makes no sense whatsoever.

@MoneyManager I would consolidate the credit cards into the one loan which I guestimate will cost you £165 a month. That deals with your current debts.
Then you need to focus on a budget that keeps future debt tightly under control and to build up a savings pot. Forget trips and expensive purchases for the time being. If you move you can buy any essential furniture you need from charity shops or marketplace, or if you must have anything new go for interest free credit deals.
If you save £200 a month for a year you will have £2400 in savings, that sounds easily achievable from what you've said and will give you the buffer you want.
ADHD might make it more difficult for you to manage your finances but you can clearly make the bit of extra effort needed to come up with more positive choices than high interest credit options. Keep up the good work!

I mostly agree OP.
I am AuDHD so the struggle is real!,

I would not take the loan at £5k or the £10k offered to you as it is at slightly over 20% interest rate without shopping around.

And read this first too
https://www.moneysavingexpert.com/loans/debt-consolidation-loans/

What are the interest rates on your credit cards?

If you do take a loan out, consolidate the debt only- so £6200

Then remove the credit cards from phone and purse/bag. Stash them somewhere so you don’t have access to them when temptation strikes. Have small automated charges go on them that you pay off each month. I do Netflix on one for example. So you’re still using and have the credit, but are showing self control.

I openly admit I have a long history of poor choices; I just do not understand money or the interest rates. All I see is numbers. I have money to pay for something or I don’t. It’s not always an active choice, a lot of my spending is anxiety driven. I am working on this though.

I know it’s madness to borrow to have some savings, but when you have had nothing and have bills to pay, the anxiety is real. I sleep better at night if I have a buffer. The thought of being homeless again is always on my mind.

I agree. I think MSE is a better resource for OP than this site because people there have been there done that got the t-shirt and are knowledgeable about debt.

In my reply upthread I forgot that interest rates are often lower for larger loans for example. (Thanks to pp for pointing it out).

Personally I’d always take a debt with a cheap or fixed rate on the longest term possible because money gets cheaper over time, and I can use the money I’m not spending on the debt for something else, but OP has her own challenges so needs to make sure she does what works for her.

I’ve certainly been given food for thought and I am going to consider a loan for only the cards amount. I can then use the savings to build a buffer and pay off the loan more quickly

I also have ADHD and was homeless as a teen. I am useless with money and am slowly paying off debts that I accrued with reckless spending.

Your idea seemed like a great plan to me! Therefore it definitely without a doubt is NOT a good idea.

If the loan for £6200 is at same 20.5% as the one offered to you for £10k, then £403/mo for 18mos would clear the debt. I would still try and find a better deal though as that is very high interest rate.

It is not a bad idea to get in habit of saving £100/mo in an emergency fund even while paying off debt especially if having that stops you from using a credit card and overspending. I find when say my washer or fridge breaks, and my emergency savings has £400 in it, I will stay under that when I replace it. If I’m shopping with a credit card, I tend to justify to myself why I must have the £600 model.

So out of the £500/mo you have…if starting an emergency fund at £100/mo keeps you from reaching for a credit card it may be worth it in the long run.

Once you have paid off the debt, increase your savings to £250/mo at least. Have it automatically transferred from checking to savings- I transfer £75/week that way, it just comes out and I don’t have to remember to do it. I don’t talk myself out of it like I did with the take it the day I’m paid or just save whatever is “left over” at the end of the month.

You are in £5k worth of debt. You can't afford new furniture or a trip. Concentrate on getting this debt paid off.

The way you need to look at it is the less debt you have, the more you will be able to access emergency money if you need it. If you have a decent credit score you will always be able to access to emergency money.

Your current approach is dangerous to you because unless you are very very disciplined. Taking out money to pay down debt, is v likely to lead you into an unmanageable spiral. It really doesn’t take long to get in over your head.

With your issues around money, look at the total debt you have. And look at how to reduce that as soon as you can.

When you have done that, you can start saving.

Money saving expert has great advice and so do Step change, who are free.

Your current mind set is problematic OP, you need a bit of handholding around the issue. ❤️

.

I would say you need to borrow £6200 assuming both are higher interest and over the shortest period you can manage.

Do not borrow for savings. Do not borrow for treats.

Spend some time with this arrangement and anything spare you have put into savings for the furniture you need and the holiday you'd like to take.

Also.look on freecycle for free furniture in case something you need pops up. It depends a bit where you are located as some places have quite a lot of people gifting to freecycle whereas other places dont

I’d still shorten the term. If you are like me, you will just pay the loan amount every month and not over-pay because something else will always seem more important for the buffer money. The longer the term, the more years to pay it off, the more you will lose in interest and the more likely you will have a really bad emergency that may push you further into debt. You want to get them cleared as soon as you can.

Instead, plan a reward for when the debt is cleared. Like that £300 trip…you cannot take it until all the debt is paid off. Save for it while paying off the debt as well…don’t use credit for it. A reward will motivate you to make every payment on time.

Also.look on freecycle for free furniture in case something you need pops up.

This and Gumtree. Cheap and free second hand stuff. You can also sell things too!

The trouble with a loan is that psychologically, it's 'free' money. It just suddenly appears in your account after you sign a document. You haven't had to decide not to get a frappe, to get Lidl own baked beans instead of Heinz, to have a sandwich at home instead of a wrap from the shop, to add a jumper instead of increasing the thermostat.

If you need to consolidate debt you can guarantee that you won't save the buffer you plan for savings. Before you know it, you are back to paying the minimum you can, taking out another credit card for the 'emergency' and thinking it might be a good idea to consolidate...

You need to get a grasp of your spending. I use YNAB. Yes, it costs money, but it saves so much more than it costs. It's really helpful to make you mindful about your spending. When you realise that to have that coffee you have to cut your grocery bill, or that if you spend an extra £20 on fuel, you have no money to pay for a birthday present, etc., you naturally reduce your discretionary spending, and stuff that seems essential is often not.

Any advice I would give has already been given. Just wanted to say I think you did the right thing to ask before acting. Proves that your past habits don’t define your future habits. Well done and good luck.

For furniture look on freecycle and freegle and Facebook.

This is a good strategy provided that you then don’t use the credit cards and run up more debt.

So before you take the loan think really clearly about what you’ll do with the cards once they are cleared. How will you stop yourself using them? Could one of them be cancelled?

You'd be paying £16k over the 5yrs. Seems like a crazy idea to me.

I’ll be paying the cards off and then closing the accounts to avoid temptation.

It definitely medical sense to do this. Maybe reduce the payment time and pay a higher monthly amount 👍🏿

But unless you change your overall spending pattern, you'll get to a tight spot and open another card.

The interest rate for the loan is horrendous , you’ll be paying back 16k on a 10k loan - absolute madness to consider using that for trips and savings: what’s your interest rate on the cards vs the loan ?

Initially you said you would keep both the cards , you really need to change your mindset