This is a standard question with no simple solution. The ultimate decision is based on the borrower’s debt repayment plan and long-term financial goals, but don’t let that discourage us from offering you some sound guidance!
When you’re looking for an answer, keep in mind that when you borrow money from a bank, you must make a certain amount of payments every two weeks or month for a set length of time. This is known as direct debt, and once you satisfy these stipulated installments, your loan will be paid off over the life of the loan.
When you are dealing with low or high variable interest rates, and how much you believe you will profit from saving money, the answer is frequently apparent. ( because early repayment penalties that can be levied by the lender cannot presently be determined)
Credit Cards @ 20% APR: It’s obvious that clearing any outstanding amounts as soon as possible will only benefit you in the long run since a Medium Risk investment portfolio cannot consistently deliver these kinds of returns.
If you were to cancel your credit card and attempt to clear a balance of €5,000 in two years, you would need to pay €254.48 per month. You could save money by paying a higher repayment rate of €354.48 p.m. In 16 months, you could pay off the debt and save about €360.69 in interest.
| Time (Months) | Total Paid | Interest | |
|---|---|---|---|
| Current | 24 | €6,107.52 | €1,107.52 |
| Revised | 16 | €5,746.83 | €746.83 |
| Savings | 8 | €360.69 | €260.69 |
Personal Loan @ 9.5% APR: Suppose you borrow €30,000 over five years. If you made an overpayment, you could pay off your loan in under 48 months and save more than €1,694.67 in interest.
| Time (Months) | Total Paid | Interest | |
|---|---|---|---|
| Current | 60 | €37,803.60 | €7,803.60 |
| Revised | 48 | €36,108.93 | €6,108.93 |
| Savings | 12 | €1,694.67 | €1,694.67 |
Anyone considering paying off their debts above what they need to should keep the following in mind:
ii) It would be best to establish a new Standing Order for any overpayment, you then control the future payments and can stop these if the need arises while always meeting the minimum loan repayments via Direct Debit
iii)Always check with the lender how they will treat any overpayment, some look to amend the monthly Direct Debit, thereby reducing the overall benefit to you as there is no interest savings made, request that the overpayment reduces the term if necessary.
iv) Consider if you can making the overpayment on a fortnightly basis, as interest on loans is charges on a daily basis, so the more often you can reduce the outstanding balance the more savings you can make
-When you are considering personal loans, keep in mind that the lender may choose not to pay your loan back. Even if you have a bad credit history, there’s no reason why you should be turned down for a personal loan. Ask about how the lender will treat your repayments if they are late or whether they will even accept them at all.
-If you’re looking for a different approach to debt management, consider making payments on a weekly or monthly basis instead of weekly or monthly.
Contact us using the details below or submit your query.
Riordan Financial Brokers Ltd trading as Riordan Financial (C30375) is regulated by the Central Bank of Ireland. When providing advice, Riordan Financial does not consider the adverse impacts of investment decisions on sustainability however this can be discussed on a case-by case basis with the individual client.
