Reader’s question – Debt repayment

4 min Read Published: 18 May 2010
''My partner took out a loan several years before we met, and now we could easily pay it off with my savings and save paying the colossal interest payments. However, the terms of the loan seem to be that we have to pay ALL the interest, regardless of how quickly we can pay it off. The loan is with Barclays. Is there any way out of this?
There isn't much point in paying it all off at once, given that they're determined to charge us all the interest for all the years remaining?''
Money to the Masses response:
Unfortunately without knowing the full details of your loan I can't be specific in my response. In any event, it wouldn’t make much difference as the first thing to do is to call Barclays and discuss your options. If they will waive the interest, in the event that you repaid the loan early, then you will find my post Money tip #60 – How to become debt free useful. However, if after talking with Barclays the situation remains the same i.e. they are determined to charge you the full interest regardless, then I'm afraid you are going to have just chalk this one down to experience.
 
Assuming the worst, from a purely monetary perspective you would be better off maintaining your savings, and loan, and then setting up a standing order, from your savings, to pay the monthly loan repayment. That way you would receive interest on your savings while you are repaying the loan - effectively reducing the cost of the debt. But, if you do this check the small print of your savings account as some accounts only allow a limited number of withdrawals before you start forfeiting interest. Also, repaying the loan this way and ensuring no monthly payments are missed will be good for your husband's credit score, particularly if he is trying to rebuild it.
 
The exact monetary benefit of 'keeping' the loan will depend on the interest rate on your savings account, the size of the loan as well as the loan term. So roughly work this out as it may be that the monetary benefit is pretty small in which case you may still wish to clear the debt in one lump sum. (This is a pretty simple interest calculator, at the bottom of the linked webpage, which will give you a rough idea). Psychologically, clearing debt is always a good thing and you may feel it’s worth a small financial penalty. Another thing to point out is that the monthly repayment method does need an element of self control, so that you don't spend your savings before the loan is repaid. Also, bear in mind that if you and your husband plan to take out a mortgage in the near future that the monthly commitment, should you ‘keep’ the loan, will likely reduce your disposable income in the eyes of a lender when they carry out an affordability test. On that basis you would be better off clearing the loan before you applied for a mortgage in order to increase your chances of acceptance.
 
(Money to the Masses can not offer financial advice. Any response to a reader's questions is for information purposes only. You should not make financial decisions based on the information provided and should seek independent financial advice)

 

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