Following years of cheap and easy credit, we are now experiencing an ever-deepening recession, and, as a result, many people are struggling with unprecedented amounts of debt.
Peter McGahan, Managing Director of Worldwide Financial Planning, advises:
“Ensure you pay off debts that have the highest interest rate first. Also, remember to pay bills that are secured to your property; if you default for long enough they will potentially repossess your house. A personal loan is less important, for example, as the loan isn’t secured on the property.
Make sure your interest is calculated at least monthly so the debt is reduced accordingly. Some banks calculate interest yearly so any payments are not really taken into account until the year end.
Also, if you have money in some form of investment or savings which is earning you 2% interest but have debt that you are being charged 9% on, it’s quite clear that the debt is costing you a lot more than what your savings are earning, so consider repaying that debt”.
Some debts, such as store cards, hire purchase and credit cards carry high interest rates, and if you are paying off several debts at high rates, a debt consolidation loan may offer a solution to this.
In simple terms, a debt consolidation loan is used to clear all your debts and you pay this loan off with one manageable monthly repayment. There are many advantages to a debt consolidation loan, such as:
- Owing one debtor rather than severa.
- Many people manage their debts by making the minimum payments, meaning the total owed will take years to clear. With a debt consolidation loan, you can see the balance owing going down each month.
- You may be able to get a loan at a competitive interest rate, saving hundreds (if not thousands) of pounds in the long-term.
- Choice of loan term means you can tailor payments according to your financial circumstances (although bear in mind that if you pay over many years, the total interest charged will be substantially higher than if you paid over a shorter term).
- Providing you maintain payments, a debt consolidation loan can drastically improve your credit rating. Whilst this is a good thing in certain circumstances, such as applying for a mortgage, it is imperative that you resist the urge to take out further credit.
One of the problems associated with obtaining a debt consolidation loan is choosing the right provider: typing ‘debt consolidation’ into a UK internet search engine displays 227,000 results! There are literally thousands of finance companies offering such loans, and it is important to make the right choice. Here are some tips to ensure you choose wisely:
- Some debt consolidation loans are secured, which means that the debt is secured to a homeowner’s property and, if the homeowner defaults on the loan, the property may be seized. While this type of loan may be the only option available to homeowners with poor credit histories, there are often other options available to those with good credit histories, such as personal bank loans or other unsecured loans.
- Pay attention to interest rates, as these can vary widely (seen below). The figures show the repayment of a £15,000 loan over 5 years, with the first column showing the monthly amount payable, and the last column shows the total amount payable – there is a staggering £4490.43 difference in the total amount payable on interest rates of 7.90% and 18.90% respectively.
If you do not feel that a debt consolidation loan is right for you or you cannot obtain further credit, there are other options available:
- An Individual Voluntary Arrangement (IVA) is a formal arrangement between a borrower and their creditors, whereby a set proportion of the total debt owed is paid to each lender. After 5 years, the debts are usually classed as settled, with any remaining debt written off.
To be eligible for an IVA, you must have unsecured debts of at least £12,000 and be able to afford to pay a minimum of £180 per month off this.
- The government are introducing Debt Relief Orders in April 2009, and these allow those on low incomes to rid themselves of debt which they have no possible means of repaying. To qualify, people must have under £15,000 of unsecured debt, no more than £50 per month disposable income and assets of less than £300.
If you are struggling with debt, always seek the help of a specialist agency such as the Consumer Credit Counselling Service (CCCS) or the Citizens’ Advice Bureau. These will be able to offer you free advice regarding the best way to solve your debt problems.