Debt Repayment Avalanche


(Ben Green) #1

I know @tom has already clearly stated that :monzo: doesn’t yet have an interest in offering credit cards or mortgages and may never do so. That’s not what this topic is about and I’m not here to change that.

The unfortunate truth however is that a lot of us still have a fair amount of debt. I know I do :cry: and one way to solve that problem is get smarter when paying it all off, which is where :monzo: comes in.

Some of you may know about the “Avalanche” method when paying off multiple debts. For those who don’t it’s essentially this:

  1. decide how much you can afford to pay towards all debts
  2. pay the minimum towards all debts except the one that’s costing you most money in interest, which gets the remainder of the total
  3. repeat step 2 until that debit is cleared.
  4. now repeat step 2 with the next most costly interest rate.

This would require inputting additional data for each debt:

  • the type of debt (credit card, loan or mortgage)
  • the interest rate
  • the % rate for calculating minimum payments (for credit cards)
  • the term remaining (for loans and mortgages) or time remaining for 0% balance transfer and 0% new purchase interest periods (for credit cards)
  • if there is a early repayment penalty, then how much (for loans and mortgages)

You’ll be alerted if the total you decide is less than the minimum for all debts combined.

Finally, if you’re coming to the end of your Avalanche or if you’re just that good with money, then after the final debt has been cleared it’ll automatically switch to pay into your savings account every month.

If you’re debts happen to be in an interest free period, then it’d make sense for :monzo: to pay the excess above the minimum into your savings until that interest free period ends when those savings will automatically be used to pay off as much as possible of the most costly debt. Though, you should of course receive a notification before this happens.


(james_e_bell) #2

I would really like to see Monzo playing in this area - just because they are not interested in loans does not mean that they cannot help out people with debt repayment.

Btw - it is not just the avalanche method above but also seeing whether people could shift their debt to lower cost alternatives (e.g. 0% balance transfer) that could be suggested.

Also (maybe something to consider for a future business model) - though Monzo are not interested in the loans market, if they did see that someone has been successfully paying off a high interest loan for many months (e.g. low risk customer) - I don’t see why they shouldnt consider offering that customer a lower interest rate taking the debt on themselves - thats the kind of observant/proactive behaviour that traditional banks are rubbish at (but would save the customer money and also make money for the bank)


(Ben Green) #3

Btw - it is not just the avalanche method above but also seeing whether people could shift their debt to lower cost alternatives (e.g. 0% balance transfer) that could be suggested.

Very true, hadn’t considered incorporating that purely because I don’t think the wanted to promote credit cards, but if they did calculate that as the best money saving option then I’m all for it.

Also (maybe something to consider for a future business model) - though Monzo are not interested in the loans market, if they did see that someone has been successfully paying off a high interest loan for many months (e.g. low risk customer) - I don’t see why they shouldnt consider offering that customer a lower interest rate taking the debt on themselves - thats the kind of observant/proactive behaviour that traditional banks are rubbish at (but would save the customer money and also make money for the bank)

The idea of :monzo:'s own peer-to-peer lending program has been thrown around but I’m not sure of the details on that.


#4

Isn’t one of the main points of Monzo that all the above is/will be doable through the API?

If there’s enough demand or interest then someone can create a ‘Avalanche with Monzo’ app, which will do all the above and more.

I like the fact the core app is being kept quite lean, and I think complex additional features are best implemented in companion applications that leverage the API to service specific communities of users.


(james_e_bell) #5

I was thinking more recommending financial solutions (or raising awareness rather than providing formal ‘financial advice’). 0% balance transfer credit card can save a lot of people money -

there is good advice on things like MoneySavingExpert on ways to optimise debt reduction but I think it is not very consumable - a ‘smart bank’ has the chance to give this advice when it is relevant and in an easily consumable fashion - Monzo has extra credibility here as they do not want to provide credit cards / loans so they could give better impartial advice


(Ben Green) #6

Much more advanced features are coming as part of the core app. Have a look at the roadmap for examples and when to expect them.

Tom Blomfield himself has hinted towards the development of peer-to-peer lending and helping with debt repayments and investments. Although those ideas aren’t included on the roadmap yet and I haven’t seen them mentioned in the community.

Personally, I’d rather have things can be done in the Monzo app actually be done in the app as I don’t want apps galore on my phone.

If it’s a gimmicky idea then fair enough, one that wouldn’t really have much financial benefit, or even if it’s better achieved through a browser extension or physical device, then those types of ideas are better left up to third party developers.


(Kieran McCann ) #7

This is something that I’ve been hoping Monzo would consider down the line when they have a good foundation with bank account holders. Being able to handle owed money smartly would help a lot of people considering the targeted debt for the UK in 2022 is over £1 trillion :scream: and most of those people are 39 and younger.

A similar method I was always taught was the snowball effect.

  • Find your lowest amount of debt you have and what you can spend to pay that off.
  • once that’s payed off take the money you were spending plus the last debt amount and pay all that towards the next lowest amount etc etc. You’re always paying off more money that way.

(Ben Green) #8

I like the snowball method as it does give the feeling of momentum that debt is being paid of as quickly as possible, but as you say, you’re actually paying more that way due the highest interest rate being attended to last. If Monzo can manage it all for you, knowing what’s best for your finances then I’d put my trust in them.