F1 - Paying back loans

How much you decide to pay back, each month or in one go, will depend on four factors:

If you have a Professional Development or other bank loan you will be paying interest on it at a relatively high rate. Therefore it will probably be a priority to pay off. You will need to come up with an arrangement with the bank as to how much you will pay off each month. Negotiate with them according to how much disposable income you have. You may have agreed the minimum amount you have to repay each month when you arranged the loan or the bank may have a maximum time in which the loan must be paid off. You can set up a direct debit for the money to come out of your bank each month.

If your bank loan is at a high rate of interest it is advisable to pay it off as quickly as possible. That way you will be paying less in the long term. However you should only agree to pay what you can afford each month based on an assessment of your full income and expenditure.

If you fail to make the required repayments on your loan then this will have a negative effect on your credit rating. If you have to stop working for any reason you will need to contact the bank to try and come up with an alternative agreement.

You will be given a minimum amount that you need to pay off on your credit card each month. Failure to pay this will affect your credit rating. You may want to pay more off each month once you start bringing in a decent wage. Interest on credit cards tends to be quite high. You can pay as much as you want off each month.

You may be able to get a new credit card at a different bank with a six month introductory interest free period. If you can transfer the balance of your existing credit card you can avoid paying interest on it. You can do this as many times as you like. However you will only be offered interest free credit cards if you have a satisfactory credit rating.

Overdrafts on student accounts often remain interest free for a period of time after you graduate. Check with your bank. You may be able to keep your overdraft for some time without paying any interest on it.

Once you start paying interest on your overdraft compare the rates with that on any bank loans that you have. If interest is at a higher rate, focus on clearing your overdraft - for example using extra income from salary increases to pay this off rather than increasing the monthly payments on your loan.

Student loans are the easiest to manage as repayments will be taken directly from your wages as soon as you start earning. You repay at a rate of 9% of your gross income once you have started to earn  over £15,000. 

Interest on student loans is set in line with inflation and therefore will be lower than any other credit you pay interest on. You should not even contemplate paying off more of your student loan than you have to until all other debts are cleared.

If you stop working, or change to a career that pays less than £15 000 a year, you will not have to keep making loan repayments until your wage rises again. Having a student loan does not affect your credit rating like other loans do.

If you are putting money into a savings account that pays interest at a lower rate than you are paying on your debts then you will be losing money each month. Therefore it is advisable to pay off your bank debts before opening savings accounts. If you have a good credit rating then you can always access further credit in an emergency.

Unlike with most loans it may be possible to find savings accounts that pay out interest at a higher rate than you pay on the loan, meaning you can make money by saving rather than paying it off.

Also you may find you need substantial amounts of money in the future, for example to buy a house. If you have savings you will not have to access further loans at higher interest rates.

See the case study with details of how much a junior doctor can expect to earn, how much student loan you will have to pay and how much disposable income you are likely to have. www.money4medstudents.org/content.asp?id=112