Consolidation Loan: Yay or Nay?
Discussion
Thought I'd post up my 'possible' short term financial plan to try and sort out my debts so they're a bit more manageable and hopefully get everything down to a lower interest rate that I can then plough any spare cash I've got into in the future. I take home £1120 per month after tax, and all my borrowing is currently with Lloyds in a current account at -£1200 with a -£1600 overdraft, a credit card at £1700 with £2250 limit and a £5k personal loan which is down to £2164 with 14 payments left. Interest on the loan is at 12% and 19.9% on both the overdraft and credit card. Also an Argos store card with nothing on it and a monthly mobile contract.
I know consolidation loans aren't always recommended as there are so many stories of them being taken out and then the original OD and cards being run up again creating even more of a mess, however I'm really serious about sorting it out this time so I'm going to force myself to be disciplined. I was planning on reducing my CC and OD limit to about £300 on each one once they're cleared, so long as the bank play ball with that idea. Lloyds are currently offering good deals on loans as low as 6.4%, I'll be unlikely to get that rate with my credit rating at the moment but I've just been through everything and noticed I've got some cards at my parents address still and I wasn't on the electoral roll at my current address. In the process of sorting all that out today so I'm hoping it will improve in a month or two. As I've already had a personal loan at 12% with no trouble I'm hoping I'll be offered in the single figures for a consolidation loan, as well as Lloyds offering a further 1% off for current account holders of over five years which I qualify for.
So long story short assuming I can get a favourable rate on a loan my plan was to borrow £7.5k to get the best rate possible. I've worked out my current outgoings on minimum payments and interest over everything and if I were to clear it all it would leave me with £240 a month so I want to try to go for the shortest possible loan duration that will keep me under that repayment amount. I won't need the full £7.5k so I was going to open a savings account in my online banking, shift the excess £2.5k into that for a few weeks then use it to lower the loan to about £5k as Lloyds loans have no charges for overpayments. I'll use the same savings account to pay any extra cash I've got into and whenever it gets up to a decent chunk (£4-500 perhaps) I'll pay it off the loan and start again.
I know it's not an ideal scenario but having tried once last year for a 0% credit card with a different bank and getting not getting accepted I'm not sure that's going to be an option for me at present. Though I'm going to work hard over the next two months at getting my credit card down a bit while I wait for my address situation to have a (hopefully) positive effect on my credit status, so I could try again before I take the plunge on another loan.
Any feedback would be appreciated, I know it's difficult to comment without knowing the exact terms of whatever loan I'd get offered but I'm hoping the idea in principle isn't completely daft!
I know consolidation loans aren't always recommended as there are so many stories of them being taken out and then the original OD and cards being run up again creating even more of a mess, however I'm really serious about sorting it out this time so I'm going to force myself to be disciplined. I was planning on reducing my CC and OD limit to about £300 on each one once they're cleared, so long as the bank play ball with that idea. Lloyds are currently offering good deals on loans as low as 6.4%, I'll be unlikely to get that rate with my credit rating at the moment but I've just been through everything and noticed I've got some cards at my parents address still and I wasn't on the electoral roll at my current address. In the process of sorting all that out today so I'm hoping it will improve in a month or two. As I've already had a personal loan at 12% with no trouble I'm hoping I'll be offered in the single figures for a consolidation loan, as well as Lloyds offering a further 1% off for current account holders of over five years which I qualify for.
So long story short assuming I can get a favourable rate on a loan my plan was to borrow £7.5k to get the best rate possible. I've worked out my current outgoings on minimum payments and interest over everything and if I were to clear it all it would leave me with £240 a month so I want to try to go for the shortest possible loan duration that will keep me under that repayment amount. I won't need the full £7.5k so I was going to open a savings account in my online banking, shift the excess £2.5k into that for a few weeks then use it to lower the loan to about £5k as Lloyds loans have no charges for overpayments. I'll use the same savings account to pay any extra cash I've got into and whenever it gets up to a decent chunk (£4-500 perhaps) I'll pay it off the loan and start again.
I know it's not an ideal scenario but having tried once last year for a 0% credit card with a different bank and getting not getting accepted I'm not sure that's going to be an option for me at present. Though I'm going to work hard over the next two months at getting my credit card down a bit while I wait for my address situation to have a (hopefully) positive effect on my credit status, so I could try again before I take the plunge on another loan.
Any feedback would be appreciated, I know it's difficult to comment without knowing the exact terms of whatever loan I'd get offered but I'm hoping the idea in principle isn't completely daft!
Sarnie said:
Why borrow the extra £2.5k only to repay it a few weeks later?
It enables me to get a much better interest rate than a £5k loan, and once paid off I've got the better rate and the same duration as I would have. Is that right or have I missed something fundamental? I asked the same question over on MSE and it looks like £7.5k is too close to my annual income so I'm not likely to get a good rate anyway, it all depends on what they say.I've been here and done this. Mine finishes in 6 months, then I'll be minted again!
I'd suggest you leave the loan, as you'll have to pay the interest if you pay it off early anyway. So you'll be doubling up.
Consolidate the rest and cancel those cards/over drafts, because it sounds like you're like me and rubbish with both. Now I only have debit cards/cash!
I'd suggest you leave the loan, as you'll have to pay the interest if you pay it off early anyway. So you'll be doubling up.
Consolidate the rest and cancel those cards/over drafts, because it sounds like you're like me and rubbish with both. Now I only have debit cards/cash!
kiethton said:
Can you not keep the loan going and move the OD/CC balance to an interest free credit card (on the provision that your credit rating allows this?)
That would be preferable, however last year I applied for a 0% for 18 months card with Halifax based on a 6/10 chance of being accepted as calculated by MSE. I didn't get accepted and I'm a bit reluctant to try any others soon after. I have signed up to Experian for their free trial just waiting for that to come through. I'm hoping the reason I didn't get accepted was my addresses for cards, store cards and mobile contract were all over the place due to a lack of admin. I've since re registered on the electoral roll and got everything registered to the same address so I'm hoping within a month or two that will show an improvement in my credit rating and I may be able to get a 0% deal this time round. Especially if I try hard the next couple of months and try and get my balances heading in the right direction.
I would aim to clear your overdraft, switch CC to 0% and leave the £2k loan to run.
Borrowing to clear debt usually amounts to more debt in my experience at least in these types of cases anyhow.
ETA if you get a card with 0% on purchases too then you can spend money on it and clear your overdraft meaning the overdraft and CC amount would effectively become 0%...
Borrowing to clear debt usually amounts to more debt in my experience at least in these types of cases anyhow.
ETA if you get a card with 0% on purchases too then you can spend money on it and clear your overdraft meaning the overdraft and CC amount would effectively become 0%...
The missing fundamental bit:-
With this £7.5K loan, no matter the term/and/or paying it off early you'll still have to pay all the interest set out at the start of the agreement.
So say the interest is on the £7.5K over the term is £900, you'll have to pay back £8.4K no mater if thats early using the £2.5K or not.
So go for the £5K if that's all your need with interest of say £600.
i.e. £5.6K over the term. It will work out better even if the interest % rate is a wee bit higher.
With this £7.5K loan, no matter the term/and/or paying it off early you'll still have to pay all the interest set out at the start of the agreement.
So say the interest is on the £7.5K over the term is £900, you'll have to pay back £8.4K no mater if thats early using the £2.5K or not.
So go for the £5K if that's all your need with interest of say £600.
i.e. £5.6K over the term. It will work out better even if the interest % rate is a wee bit higher.
Edited by Evo141n on Friday 31st January 15:12
Evo141n said:
The missing fundamental bit:-
With this £7.5K loan, no matter the term/and/or paying it off early you'll still have to pay all the interest set out at the start of the agreement.
So say the interest is on the £7.5K over the term is £900, you'll have to pay back £8.4K no mater if thats early using the £2.5K or not.
So go for the £5K if that's all your need with interest of say £600.
i.e. £5.6K over the term. It will work out better even if the interest % rate is a wee bit higher.
Thats not how interest is calculated.....you pay interest each month based on what you owe, not the amount you borrowed at the outset. Make a large over payment, the capital reduces as does the interest payable....With this £7.5K loan, no matter the term/and/or paying it off early you'll still have to pay all the interest set out at the start of the agreement.
So say the interest is on the £7.5K over the term is £900, you'll have to pay back £8.4K no mater if thats early using the £2.5K or not.
So go for the £5K if that's all your need with interest of say £600.
i.e. £5.6K over the term. It will work out better even if the interest % rate is a wee bit higher.
Edited by Evo141n on Friday 31st January 15:12
Sarnie said:
Thats not how interest is calculated.....you pay interest each month based on what you owe, not the amount you borrowed at the outset. Make a large over payment, the capital reduces as does the interest payable....
I'd thought this was the case hence the idea of getting all my debts into a single loan then ploughing any free cash into overpayments as and when I could. However this all does depend on my credit rating and getting accepted for a loan at a better rate than my current one. If this doesn't happen I'll just have to spend the next few months with belt firmly tightened to try and get both overdraft and CC balances dropping which will hopefully improve my rating enough to look at loans or 0% deals.Speak to somebody from Lloyds in branch or on the phone and they will be able to tell if they are able to offer you a loan and at what rate straight away without having to make a formal application.
If your credit card ISN'T currently with Lloyds then they can also check if they are able to offer you a 0% balance transfer.
If your credit card ISN'T currently with Lloyds then they can also check if they are able to offer you a 0% balance transfer.
My credit card is also with Lloyds so no chance of a 0% unfortunately. I did go in and ask about a consolidation loan but, bearing in mind my current loan is at a rate of 12% the best they could offer me for £7.5k was 22%! Obviously not worth me bothering with, the advisor I spoke to was surprised they couldn't do any better than that as he couldn't see any reason I wouldn't be offered 12% again, he thought there must be something on my credit file their system didn't like. I'm assuming this is probably the address/electoral roll discrepancy that I'm already aware of so I'll give it a month or two before I do anything else.
Sarnie said:
Thats not how interest is calculated.....you pay interest each month based on what you owe, not the amount you borrowed at the outset. Make a large over payment, the capital reduces as does the interest payable....
Yes I understand that’s true for mortgages, but I was of the understanding that unsecured personal loans work as I described.i.e. that you had to pay the full amount of interest as agreed at the outset of the loan.
Unless, I guess, if you had some special mechanism with the loan to allow it to be paid off early negating the later interest.
If what you and the OP say is true then everyone would take out the maximum loan at the lowest rate and use the excess to help pay back the loan. I don’t think that’s how banks work.
Evo141n said:
The missing fundamental bit:-
With this £7.5K loan, no matter the term/and/or paying it off early you'll still have to pay all the interest set out at the start of the agreement.
So say the interest is on the £7.5K over the term is £900, you'll have to pay back £8.4K no mater if thats early using the £2.5K or not.
So go for the £5K if that's all your need with interest of say £600.
i.e. £5.6K over the term. It will work out better even if the interest % rate is a wee bit higher.
Last time I took out a loan over 2 years it was cheaper to borrow £7.5K (5.9% APR) than £4K (18.9%APR) - £500ish interest against £700ish interest, so I just stuck the additional £3.5K in a savings account and used it to pay the last 10 payments. - Lloyds like a lot of banks have a sweet spot for the best amount to borrow and the amount of time to borrow it for. I just checked at the moment it's 24.9 APR for a £4000 loan, 6.4% for £7500 both over 2 years, so it's still cheaper to borrow more, crazy but true. With this £7.5K loan, no matter the term/and/or paying it off early you'll still have to pay all the interest set out at the start of the agreement.
So say the interest is on the £7.5K over the term is £900, you'll have to pay back £8.4K no mater if thats early using the £2.5K or not.
So go for the £5K if that's all your need with interest of say £600.
i.e. £5.6K over the term. It will work out better even if the interest % rate is a wee bit higher.
Edited by Evo141n on Friday 31st January 15:12
Edited by anonymous-user on Tuesday 4th February 14:17
Here's what a recent HSBC one had in it
HSBC said:
At the beginning of the loan agreement we work out the interest you will pay over the whole period of your loan using the annual simple interest rate shown above and add this to your loan balance. We calculate your interest charge by applying interest at the simple rate to the balance of your loan account, as reduced by your scheduled repayments.
Evo141n said:
Yes I understand that’s true for mortgages, but I was of the understanding that unsecured personal loans work as I described.
i.e. that you had to pay the full amount of interest as agreed at the outset of the loan.
Unless, I guess, if you had some special mechanism with the loan to allow it to be paid off early negating the later interest.
If what you and the OP say is true then everyone would take out the maximum loan at the lowest rate and use the excess to help pay back the loan. I don’t think that’s how banks work.
Your wrong, it works in exactly the same way as mortgages. The total interest set out at the start is assuming no overpayments throughout the loan, overpay and the capital reduces and therefore so does the total interest payable.i.e. that you had to pay the full amount of interest as agreed at the outset of the loan.
Unless, I guess, if you had some special mechanism with the loan to allow it to be paid off early negating the later interest.
If what you and the OP say is true then everyone would take out the maximum loan at the lowest rate and use the excess to help pay back the loan. I don’t think that’s how banks work.
Sarnie said:
Your wrong, it works in exactly the same way as mortgages. The total interest set out at the start is assuming no overpayments throughout the loan, overpay and the capital reduces and therefore so does the total interest payable.
Very few unsecured loans accept overpayments. The above example included.OP I can't see you've stated?
SmuttyYoda said:
Very few unsecured loans accept overpayments. The above example included.
OP I can't see you've stated?
My current loan accepts overpayments and so does the one I am contemplating applying for. I think recent crackdowns on the banks have forced them to be much more flexible with their loans in terms of overpayments and early settlements, the fee for completely paying off my loan is quite reasonable at 2 months interest. (approx £60 I believe)OP I can't see you've stated?
I think you'd have to be extremely desperate or extremely stupid to take out a loan that didn't allow any kind of overpayment at all. Unless it's just restricted to Lloyds, I was under the impression that most lenders operated under this principle. Any overpayments I make on a loan from Lloyds reduce the outstanding balance and shorten the loan duration, the monthly payment figure remains the same.
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