Please help explain how my debt consolidation loan works

K

kennedy

Guest
I’d be really thankful for help from any of you experts out there.

I have two loans with the BOI, one with 6000 and the other with 7000 left to clear. Both end in 2008.

No problems with repayments, which amount to about 750 a month.

I also have about 3000 to clear on a credit card and mentioned this to a more clued-in friend recently and he recommended that I apply for another loan to clear all the current debt and free up some extra money for some house improvements.

So, I applied for a loan of 25,000 from the BOI, stating (honestly) that it was partly for debt consolidation and partly for home improvements.

I have just been accepted for the loan. The repayments are just under 500 a month.

This is where I start asking you stupid questions because I’m an idiot when it comes to understanding this stuff!

How does this loan work (the jargon on the documentation I got today was beyond me, it made some mention of closing the current loans)? Will it first clear the 13,000 I already owe on the two current loans, and then leave me with roughly 12,000? So will those combined 750 a month repayments be cleared, leaving me with just the 500 a month on the 25,000 loan (over 5 years)? Or am I missing something embarrassingly and expensively obvious?! :eek:

If that is how it works, that I would be left with just 500 a month to repay, that would be brilliant, I can manage that relatively comfortably, but I’m afraid I’ll actually end up repaying 500 + 750 a month…..which wouldn’t be funny at all.

Sorry for my stupidity, would welcome any clarification. Thanks.
 
Re: Please help explain how my debt consolidation loan works?!

Back of envelope calculation would suggest it's just 500 per month, not 500+750 but you SHOULD go back to the bank and clarify. TBH, you probably shouldn't have signed on the dotted line until you fully understood. Alot of times we feel embarrassed by asking questions (or are made to feel embarassed...) but there's no such thing as a stupid question when it comes to your own money!

A few other points:
- debt consolidation is about replacing multiple loans with one loan, usually of a lower interest rate. You don't mention what rates the different loans are at.
- the credit card loan is probably the most expensive. Make sure you pay it off straight away when the loan comes through, rather than leaving the money in your account!
- while your monthly payment has gone down, the term is now longer, 5yrs instead of finishing in 2008. Over the life of the loan you will end up paying more interest.
- you don't mention how you ran up the debt to begin with. If it's due to "lifestyle spending" i.e. spending more than you earn, then you haven't fixed the problem, just delayed the pain.

Good luck!
 
Re: Please help explain how my debt consolidation loan works?!

Cut up that credit card after you pay it off. Or preferably BEFORE you pay it off. :)
 
Re: Please help explain how my debt consolidation loan works?!

Thanks a million Tiger!

I should have made clear that I haven’t signed anything yet, stupidly enough I applied for the loan without being entirely sure how it all worked, but I’m not committed to anything yet. As you might be guessing by now, I’m not the smartest when it comes to money. :eek:

I can’t remember the interest rates off the top of my head but the current offer is definitely lower than the first two loans, I made sure to check that (not by much though).

The credit card debt was a once-off spell of madness when I used it for an expensive holiday and spending once I got there. I’ve already been on to my credit card company about reducing my limit to 1000 (they raised it to 8000 – needless to say, without me asking for the raise). I would actually love to get rid of it completely because the 3000 debt gave me such a fright, but I really can’t do without it.

I accept that because the term is now longer I’ll be paying more, but for the peace of mind (in terms of clearing the credit card debt) and for the extra funds it provides I don’t mind too much.

Thank you again for the info and advice, you’re a star.
 
Re: Please help explain how my debt consolidation loan works?!

extopia said:
Cut up that credit card after you pay it off. Or preferably BEFORE you pay it off. :)
Click to expand...

Thanks extopia, I think you're probably right. As I said above I'm seeing to it that the credit limit is reduced to 1000, but I wish I could do without it completely.
 
Great idea to ask them to reduce the limit. It's hard to do without a credit card, I agree, for booking flights, renting cars, online purchases etc. If you can keep it manageable that's cool. So many people feel "priviliged" when their limit is raised, as if they're getting free money from the CC company.

Obviously you're smarter than that, and I wish you luck in your debt-reduction programme.You need to ask more questions at the bank though. :)
 
Kennedy,

Please do ask your bank to clarify if you're not sure about something. As a banker, I am quite happy to explain anything to a customer. That is our job & we don't think clients are idiots if they need clarification. What we do NOT like is when customers sign on the dotted line & then come back a few months later needing to change something because they didn't understand it in the first place. That creates a lot more work.
 
AFAIK, the bank will give you 25,000, and what you do with it is pretty much up to you. It's your responsibilty to go off and use it to pay off your other loans. Once the 25000 hits your account, do a few transfers to pay off the rest of your debt, and you'll be exactly where you want - paying only 500 a month and with money in the bank.

I did the same with a bit if CC debt and a student loan a few years ago, and it was definately worth it. The other thing you might want to consider is shortening the term of the loan. If you can easily pay 750 now, why not continue to pay that?
 
A few other questions the OP should consider.

Is the loan a fixed or variable loan?

What fees/penalties are involved for early payment of the loan? (if variable it shouldn't be an issue, but check to make sure. Given you can service both loans atm at the higher monthly payments it might be a good option to go for a loan with minimium penalties and aim to pay it off as early as possible [the months you have the extra €200 or so still left over in the kitty pay it from the loan] saving on the interest over the term of the loan)

The consolidation loan may be worth the additional costs due to the increased quality of life (both extra monthly spending money and reduced stress) but do consider your other options.

The section of the loan for home improvements can recieve similiar tax relief as your mortgage payments, I'm not sure how this may be complicated if included as part of the consolidation loan but check out details to ensure you recieve all benefits possible from the home improvement works and the costs you pay towards them (hopefully someone with more knowledge of this side of things can fill in some proper details that I lack).

Never be afraid to ask the questions, the person your dealing with in the bank is being paid to help you and will happily clear up any problems or issues you raise, but only if you raise them!
 
Alias said:
AFAIK, the bank will give you 25,000, and what you do with it is pretty much up to you. It's your responsibilty to go off and use it to pay off your other loans. Once the 25000 hits your account, do a few transfers to pay off the rest of your debt, and you'll be exactly where you want - paying only 500 a month and with money in the bank. quote]

I think most banks when involved in a loan for debt consolidation will actually send cheques directly to the companies with which you have outstanding loans. Any balance is then transferred to your account or paid by cheque.
Click to expand...
 
"Will it first clear the 13,000 I already owe on the two current loans, and then leave me with roughly 12,000?"
Yes
"So will those combined 750 a month repayments be cleared, leaving me with just the 500 a month on the 25,000 loan (over 5 years)?
Yes
"Or am I missing something embarrassingly and expensively obvious?!"
unfortunately yes....you still have cc of 3,000.

Clear 3,000 off cc leaves you with 9,000 for HI.
Reduce cc limit to 1,000 as you suggested but when you make a purchase with the cc. Make a payment of that amount to your cc.
 
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