Debt Bombing

[Guest]

Not sure if this is of interest or not so put it on here.

I have a friend(no really, it is not me or one of mine). She has just started receiving her state pension but cannot claim her company one for another four years so is continuing to work. The result is that she is going to be about £500 a month better off.
She has all the usual debts, second charge mortgage with about ten years to run, credit cards, catalog etc.

She wanted to know the best way to use this extra money in order to be as near to debt free when she retires proper.

My initial thoughts were to pay off the higher interest loans first, I did a number of spreadsheets illustrating the reduction in repayment periods for increased monthly repayments the results were quite surprising, especially on the higher APR loans.

However a CAB adviser i know introduced me to the idea of debt bombing which is something I had not considered, this method involves paying off the loans which can be settled in the quickest time, using all available excess capital.
When one debt is paid the money saved on that particular monthly repayment is used to "bomb" the next debt.

The calculations to see which method is best are surprisingly complex, as of course whilst one interest free debt is being paid another is drawing interest, she is not of course considering stopping the agreed payments on any debts.

Just wondered of anyone else had any thoughts.

[Nibbler]

Re: Debt Bombing

To see quick results by initially settling some accounts earlier must give a physiological boost to someone paying things off. So I can see the appeal as you must really feel you are getting somewhere.

Obviously the most sensible long term strategy would be to throw all excess income above contractual payments against the debts accruing the most interest and/or charges, i.e do a conventional snowball.

[Amethyst]

Re: Debt Bombing

I think [MENTION=48934]Debt Camel[/MENTION] wrote an article about this a while back - called snowballing ? I posted it on here, will have a look for it.

http://en.wikipedia.org/wiki/Debt-snowball_method Wiki

http://debtcamel.co.uk/debt-options/snowball/ Debt Camel

[Nibbler]

Re: Debt Bombing

For the normal snowball (not bombing)

http://www.whatsthecost.com/snowball.aspx?country=gb

or

http://www.stoozing.com/calculator/s...calculator.php

can be useful.

[Guest]

Re: Debt Bombing

To see quick results by initially settling some accounts earlier must give a physiological boost to someone paying things off. So I can see the appeal as you must really feel you are getting somewhere.

Obviously the most sensible long term strategy would be to throw all excess income above contractual payments against the debts accruing the most interest and/or charges, or do a conventional snowball.

Yes that was my initial reaction also, it i amassing how even a small increase in monthly payments alters the amount repaid on a loan where the interest is calculated monthly on the remaining balance .
However, on doing some practical comparisons, this is some times made up for by having the extra sums available after the more short term(although generally interest free, catalog etc) to supplement the subsequent payments to other higher interest accounts accounts.

I suppose the answer depends on individual circumstance but interesting I thought.

[Guest]

Re: Debt Bombing

Hi thanks for this, I didn't coin the phrase by the way, never come across the concept as I say it was introduced to me.

[Amethyst]

Re: Debt Bombing

I think the key is to keep up minimum payments on all the debts except the one you chose to 'bomb' or 'snowball'

It helps to have an excess income so it's not something everyone could do but sounds like your friend is in an ideal position to start doing this.

[Guest]

Re: Debt Bombing

For the normal snowball (not bombing)

http://www.whatsthecost.com/snowball.aspx?country=gb

or

http://www.stoozing.com/calculator/s...calculator.php

can be useful.

Thanks again the calculator is just the job

[Guest]

Re: Debt Bombing

I think the key is to keep up minimum payments on all the debts except the one you chose to 'bomb' or 'snowball'

It helps to have an excess income so it's not something everyone could do but sounds like your friend is in an ideal position to start doing this.

Yes she has always manged to scrape by narrowly avoiding defaults on many occasions so has never managed to build up any savings, which is another consideration.

[Debt Camel]

Re: Debt Bombing

I've not come across the term 'debt bombing' before. In the US, snowballing is usually done going for the smallest debts first, so you get some 'quick wins' and a psychological boost. Dave Ramsey is a big advocate of this approach.

In the UK, people normally advocate paying off the highest interest one first. This is more efficient because it means you pay less interest overall.

But another factor is whether by paying off a debt you might be able to get a 0% balance transfer, which will speed up repaying the rest. So you pay off a credit card, call up to close it 'unless you can offer me a deal'.

I normally suggest basically highest interest first, but modified sometimes... see a few examples here http://debtcamel.co.uk/debt-options/...ling-examples/

There are a lot of great deals around at the moment if her credit records is good enough to get one: http://www.moneysavingexpert.com/cre...r-credit-cards

[Tools]

Re: Debt Bombing

Another consideration is to approach each creditor and ask for settlement figures at x date if she were to pay off the balance in full with one payment. She may be surprised at some of the figures as they do vary in reductions between creditors.

For example a £500 balance with :-
Creditor A may give a settlement figure of £450
Creditor B may give a settlement figure of £400

That's just a rough example to explain my thinking but gives you an idea what I mean.

[Guest]

Re: Debt Bombing

Many thanks for the input. Using the calculators, it seems the method is to use all funds to pay the high interest rate loan first, once this is paid using the increased monthly available cash to pay the next and so on.
This makes sense i suppose, as said the only drawback is that there is some time before she sees any improvement, probably a small price to pay but as said it is a factor.
I mentioned the idea of consolidation or using interest free credit cards and transferring balances to her as part of the overall plan, to me it seems like a good idea, however she is of the mindset that she wants to get rid of any credit and not take on new cards,
I try to explain that the practice would be a temporary one and a means to and end, but i fear to no avail, and perhaps she is right, once you have the facility for future credit you tend to use it i find.

Her main issue is a second charge mortgage with GE money which has a balance of around 8k on it and is running at an APR of 21%.

The idea of a full and final is one we have considered for her, however currently as said she has no savings, it is possible to use part of her income to pay the high interst loan and use the balance, say 200 a month to build up a pot of money for twelve months i suppose, this would enable her to make offers and give her a little nest egg for emergencies.

An added complication is her catalogue, her repayments on this will decrease of course as she repays the balance, freeing up more money, also she has a buy now pay later deal with them which comes due in about 6 months, after which she will start inuring 29% interst, so this needs sorting as a priority.

[Tools]

Re: Debt Bombing

She also needs to look into early repayment or overpayment clauses, sometimes there are penalties for doing so, especially with mortgages. Get her to check she can actually make overpayments etc

[Guest]

Re: Debt Bombing

She also needs to look into early repayment or overpayment clauses, sometimes there are penalties for doing so, especially with mortgages. Get her to check she can actually make overpayments etc

Yes , she has a mortgage which this would apply to an has about 5 years to go, so we are leaving that alone, the second charge is regulated so there is no problem with early repayment, to be honest I thought this would be an easy thing to do when she she asked me, and probably if i was in this position I would just pay a bit here and a bit there and get the debts down as and when.

But with it being for someone else you want to get all the figures right, and really i would like to give her a plan which she can stick to and represents the best options for her.