How do I structure my finances..for now?

by SimpleGuy84 29 June 2009 |

23 comments | Love

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Thanks to lovemoney.com, I've managed to get on paper exactly where I stand on a few things and now I need some advice to take me to the next level...

I've got about £6k in savings and my debt make-up is something like this (the loan amounts are settlement figures as at today 29/06):

Loan: £3,078.43, £112.62 per month, 28.9% APR
Loan: £1,801.90, £89.34 per month, 14.01% APR
CC: £2,893.73, £75 per month, 23.9% APR

I desperately want to clear my debt and am thinking of taking the "snowball" approach for my CC.

How? By paying off the larger loan from my savings (as rates are rubbish) and taking that extra bit to pay off the CC as quickly as possible. Tempted also to pay off the other loan early at some point.

I intend to save c. £150-£200 a month as an aside....

So, in general terms, my question(s) are:

1) Is it wise to pay off a loan from savings?
2) My credit rating is poor so will the above steps contribute towards improving it or should I undertake another strategy?

Cheers

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Comments (23)

37

lovebunny posted
Hey SimpleGuy84,
Good question. Nice to hear the site has been such a help to you.
My first thought -- keeping in mind I am NOT employed as a financial expert, so a pinch of salt, if you please -- is that 28.9% APR is a punishing interest rate, and that if you have money to pay that loan off, my god, man, get to it!
If you can do this and kill off that nasty CC debt, all the time whilst saving, I would say you are in a strong position. Loan 2, with the lower APR, in my mind is maybe not quite so urgent, if you want to keep a savings cushion just in case.
What does everyone else think?
Posted on 29 June 2009 | Love 0 loves Report
3

SimpleGuy84 posted
lovebunny,
Thanks for your response.
Is it better to save and service debt at the same time, or just pay of debt before saving?
Posted on 29 June 2009 | Love 0 loves Report
37

lovebunny posted
Well, it's a toss-up, I guess.
On the one hand, debt usually costs a lot more than savings (yours certainly do), so it's not sensible to save at a low rate when you are forking out a really high rate of interest to service your debts.
My colleague Neil Faulkner votes to pay off debt before you save, but some of the debt experts in our community (I'm thinking of those people who 'staff' The Motley Fool's Dealing With Debt board) swear by having an emergency fund, just in case.
If you think there is a good chance you'll need some savings to fall back on (maybe you're in danger of being made redundant?) I would advise you keep a good stash of savings, just in case. But if you feel more confident about your income and lifestyle, maybe save less and pay off more.
Posted on 29 June 2009 | Love 0 loves Report
2

Andrew Morris posted
Hi SimpleGuy84
Echoing lovebunny...pay off your c/c debt pronto. Like, yesterday.
And, if there are no early repayment penalties on the loan - and your employment is as safe as can be these days - nuke that 28.9% APR loan now too.
Of course it's good to keep a rainy-day savings fund, but I'd err on paying off any debts with those sorts of APRs first. And yes, this approach should help your credit rating.
Good luck.
numbersorwords - a member of the lovemoney.com team
Posted on 29 June 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Ok...well a little more background is that I've just started a new job having recently been made redundant (which is where much of the windfall has come from).

I've moved to a local government job and it's pretty safe at the moment paying me a better salary so I've got a bit more breathing space.

I'm 24 (25 in August) and, although I've been working for a while, I've not been particularly disciplined with my money. I want to start building for my future and I think now is the time to start...

So, pay off debt first before saving? Or do a combination of both? Say £150 a month to save and the rest to service my debt?
Posted on 29 June 2009 | Love 0 loves Report
804

MikeGG1 posted
SimpleGuy
Are those APR figures the original terms of the loans? I am concerned about the amount of penalty charges that may be incorporated in the settlement figures. How many months are still outstanding on each of the loans?
It is not the original APR that is important now, it is the effective APRs that those settlement figures are equivalent to that matter.
Mike
Posted on 29 June 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Mike GG1 - these are the APRs that they quoted me when I asked them for the settlement figures.
No payments have been missed on either of the loans and I'm happy for them to carry on being paid as they are until I've got a hold on my finances.
I could just leave the loans where they are and pay of the CC first and not touch my savings?
It seems like a relatively simple choice but I'm torn. I've got a lump sum which I can pay off a loan with or I can save and snowball my CC!!! ARGH!
Posted on 30 June 2009 | Love 0 loves Report
85

ckm4328 posted
I would get rid of the C/C and the higher interest loan.
The extra money earned per month from paying these off I would save until you have enough to pay off the additional loan.
Nuke the loans and then save. I particularly advise this as you say you are not good at bugeting if this is the case you may set out to save and pay of your debts but instead spend the money on extra little luxuries.
I used to have a similar problem and tried the approach of using extra income to pay off debt rather than capital and found I struggled to be disciplined ended up paying extra money joining gym and getting unlimited cinema pass etc.
Posted on 30 June 2009 | Love 2 loves Report
804

MikeGG1 posted
SimpleGuy
The 28.9% can't be the settlement APR unless you are having to pay them more than is outstanding. You have supplied the settlement amount and the monthly amount that you are paying. Please supply the number of outstanding payments so that I can assess the true rates.
Then an order of priority can be suggested.
Mike
Posted on 30 June 2009 | Love 0 loves Report
52

Dave posted
Hi SimpleGuy,
An easy way to think about saving or clearing loans: Debt costs you more than you get on savings, so clearing debts is better as you end off better off overall.
It all comes down to how secure you feel right now (as NumbersOrWords said). If it was me, I'd lump the 6k to pay off the expensive loan, leaving £2,900.
I'd try to get a 0% Balance Transfer credit card (the Virgin one looks good - reasonable term and low(ish) fee). I'd transfer the 2.9k to this card and pay it off over 14 months (£210 a month) and use it for nothing else. I'd cut up all my other credit cards. I'd pay off the 1.8k loan, leaving me £1,100 ready cash.
If I couldn't get a 0% BT card (because of my credit rating), I'd pay off this card debt with the remain 2.9k and cut it up, leaving me with zero savings, but the ability to save £390 a month. After 20 months (or so) the cheaper loan will have been paid off and I'd have £7,800 in savings and now I could save £480 a month :)
From an earlier Q&A I asked, it seems at least 3 months living expenses should be available in instant access cash, hopefully that 7.8k would be enough, so I'd then pursue ISAs etc to start saving without the tax hit (at £480 a month I'd be over my cash ISA limit so would feel quite smug about my savings).
At this point, I'd expect my credit rating to be quite a lot better too.
Good luck!
Posted on 30 June 2009 | Love 2 loves Report
3

SimpleGuy84 posted
@ Mike GG1 - I'll find out from the company. Do I just ask them the settlement APR?
@ Dave - that is excellent advice. I'll get the settlement APR for Mike GG1 first and see what the outcome is thereafter. The only thing is I'm so proud of seeing some money in my savings at the moment, I'm a bit scared about parting with my money to pay off these loans :(
Posted on 30 June 2009 | Love 0 loves Report
804

MikeGG1 posted
SimpleGuy
Don't bother going back to them. Just tell me how many instalments have still to be paid on each loan. I can do the rest.
Mike
Posted on 01 July 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Loan 1: (@ 14.01%) 22 months left
Loan 2: (@ 28.9%) 53 months left (including this month). The total balance of the loan is: £5,968.86 (including interest)
Hope that helps!
Posted on 02 July 2009 | Love 0 loves Report
52

Dave posted
If you pay £3,100 to pay off the loan 2 today, you save nearly £2,900 in interest payments and save about £6,000 over the next 53 months! You are better off almost £9,000!
Paying off loan 1 will save you about £150 over the next 22 months and allow you to save £1980 (22 lots of £90).
If you cleared both today, you'd save yourself £3054.01 in interest payments!
If you managed to transfer you CC to a 0% balance transfer card, and put all the money you currently spend on your debt each month (£276.96) you'd be able to pay it off in 11 months!
At this point you'll be able to start saving £476.96 a month (assuming you're able to save £200 a month now) with no debts to service. 42 months after paying off your card, you have saved £22.232.32 (including saving £200 a month whilst paying off the CC)!!
If you keep the savings untouched, you won't pay off the credit card any time soon and in 53 months you'll probably still have £2,000 on the CC, cleared loan 1 and just cleared loan 2, with savings of (£200 * 22 + £290 * 31) £13,290... nearly £9k less and still have 2 grand outstanding on your CC!
Posted on 02 July 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Dave - you're scaring the life out of me with all these figures and I'm lost in them! ARGH!
Are you suggesting that I blast my savings out of the window and pay off my debts?
I can't transfer my CC debt to a 0% card for sure.
I'm thinking of clearing my loans (c. £5k) and, at £280 per month, I can clear off the CC debt in 10 months.
I'll still have £1k in savings at the start growing £3k in 10 months (at £200 per month).
I don't know what to do!!!
Posted on 02 July 2009 | Love 0 loves Report
52

Dave posted
Sorry - my wife always tells me to cool it down when I jump in at the deep end with the numbers too... I'll use round numbers...
Basically you end up much better off by paying off your debts as soon as possible then save. BUT you have to be comfortable with having a secure income and enough 'emergency' reserves.
Loans:
If you pay off both loans today, it will cost you just less than £5,000 (from your first post) today taken from your £6,000 savings pot.
Now you don't have to pay for the loans each month, you have freed up over £200 a month.
You will still have about £1,000 in savings (as you say).
Credit card:
Having £3,000 on your credit card and paying £75 a month means you will spend a very long time paying it off. I suggest you use the £200 a month extra you would have after paying off your loans as well. This means that along with the £75 you currently use each month to pay off your card you will pay £275 a month.
If I was in your position and having £1,000 in the bank, I would also use any spare money each month to pay of the card as quickly as possible (rather than saving it whilst in debt). If you think you could save £200 a month now, I would put that on the card too.
This means paying about £475 a month off your credit card and about 5 months until the card is clean.
Once the card is paid off too, I would then start saving all of this each month, but I really don't like this sort of debt and know that in only 6 months I could be debt free and maximising savings, whilst keeping £1,000 in the bank the whole time, just in case :)
Posted on 02 July 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Dave - see how a little bit of structure goes a long long way!
So, it's all about paying off my loans and snowballing my CC...
Posted on 02 July 2009 | Love 0 loves Report
52

Dave posted
Hey SimpleGuy,
How's it going?
Have you decided on a plan of attack?
Posted on 13 July 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Dave,
I haven't yet - I'm recuperating from an ear operation.
I will now - here's what I'm thinking of doing:
Pay off loans and use extra money to pay of credit card asap and save a fixed amount (£200) a month?
What say you...
Posted on 13 July 2009 | Love 0 loves Report
52

Dave posted
Sounds good!
To be honest I was thinking that paying off the card ASAP would be better then start saving, but I have just had a play around with our loans calculator (buried deep under the site for some reason and I'm sure we used to have a better one somewhere) and actually it works out about the same after 1 year, just the date you are debt free changes a bit...
With the APR and credit card debt you say in your first post (rounded off to the nearest pound or the calculator breaks), you will have cleared the credit balance in 12 months paying £275 a month :)
You will have also saved nearly two and a half thousand pounds on top of the thousand pounds you will have left after paying off your loans :)
Posted on 14 July 2009 | Love 0 loves Report
3

SimpleGuy84 posted
Today is one of those bittersweet days. Liberation and depression all in one beautiful little package flung at your face by the girl of your dreams who is actually pretty annoying but so...SO good looking.
Why the frustration I hear you ask? Well...this is why.
I've paid off my loans (hurrah!). I'll be saving just over £200 per month and I've knocked off over £4,700 from my debt and STILL have £2,700 left over. Beautiful.
Then it dawned on me that the 3 years I spent working part-time and studying at University cost me. A loan. Student Loan. Interest rate isn't too bad - 1.5%...swimming along nicely at about £157 per month directly from my salary. Called them today for an outstanding balance and *choke* - £7,996. £7,996.
So now, a new question. I am able to pay more to my student loan (they have the functionality) but I also have this CC with £2,893 at £75 per month.
Should I split the £200 two ways and pay more to both or should I focus on paying off one and let the other run its course. My credit rating is the one that needs some improving so I'm not sure what the impact is of either on my credit rating.
Dave - hug...me...
Posted on 28 July 2009 | Love 0 loves Report
52

Dave posted
It's ok.
Take a breath.
Congratulations!!! You have removed two huge mill stones from your life! AND You have over two and a half grand in the bank as Brucie bonus! Well done, I know it takes a lot of resolve to do, but I really think you will never regret doing it! :)
You are down to just two debts, one is big with rubbish terms, one is much more reasonable and both are appear to be flexible enough to allow you to over pay as and when you want without penalty, which is a big bonus!
The newly remembered student loan
Almost everybody who has gone through higher education has a student loan. Because of this they hardly touch your credit rating. The money is taken after tax, so that £157 a month is money you could stick in your savings. BUT you forgot about it before, so it is not £157 a month you noticed or need right now.
As I said, a lot of people have student loans if they were ever students. The way the loan is structured and the deal you enter (taken direct from payroll) means that they are more sure of getting their money than a regular loan. This means they offer a much lower rate (1.5% in your case). However, to make any real money from this, they need you to have the loan for a long time. To this end, I think it will take you about 5 years to clear this debt from your name at the current rate. However, it isn't going to kill your credit rating and it isn't hurting you financially right now, so I would say leave it be for the next year and concentrate your efforts on the credit card.
The credit card
I think you need to start clearing the big scary credit card with the extra £200 a month you now have so that too will just a bad memory by autumn next year, just like the original plan. This will let you save some money each month to add to your pot so in 12 months time you should have about £5,000 in proper, pucker savings.
It will also mean that by the end of next year you could put an extra wad against your student loan each month and save and extra wad each month!
I would also expect that your credit rating will improve quite a lot and pretty soon; they are fast at picking these things up.
In fact you may even be able to get a 0% balance transfer card next month...
0% BT card
If you could get a 0%BT card, the debt will only cost you £90 (3% transfer fee) and you will pay it off in 11 months. Your current card will cost you £350 (total amount you will pay minus the amount on the card) and take 12 months :)
Congratulations again! I'm really pleased for you.
Dave
Posted on 28 July 2009 | Love 2 loves Report
52

Dave posted
Hey there SimpleGuy84,
As it's been a while, I thought I'd just pop in and ask you how it's going?
All good I hope?
Dave
Posted on 26 February 2010 | Love 1 love Report

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