Managing your debt

Most of us have debts of some form.

Car loans, personal loans and outstanding credit card balances are all debts. Debt can be useful, allowing us to buy the things we want, when we want them – and pay for them later, either at the end of the month (credit cards) or in nice manageable payments (loans).

Though loans and credit cards can be useful, having multiple loans can be confusing, as well as expensive. Not only do you need to make several payments each month, probably on different days, but it is likely that each loan will attract a different interest rate. You can quickly lose track.

If you’re on top of your loans, this can be confusing enough, but if you’ve missed a few payments (even by accident) you can easily find yourself falling behind. Missed payments usually lead to late fees and extra interest, which can quickly snowball – particularly if you are on a tight budget.

As the average UK household owes £8,000 on unsecond mortgages and credit cards, the sums involved can be quite large and swallow a significant part of the average income.

So what can you do to avoid loans and debt becoming an issue for you?

First of all, sit down and work out how much you owe and who you owe it too. Be realistic – include every loan, hire purchase agreement and existing credit card balance. And don’t forget any arrears or balances you may have on your utilities such as gas, electric and water. Include the repayments for these debts in your budget. Then you can come up with a plan to deal with potential problems and ensure that you manage your loans and debts completely and properly.

Prioritise your most important monthly payments – these will be your mortgage or rent, your utilities and council tax. Whilst you can’t ignore your other loans or credit, you should make sure that you make these priority payments first.

Your plan will depend upon your individual financial circumstances. If your loans are affordable and you can comfortably afford their repayments you may choose to leave them as they are – making sure that you make your payments each month until they are cleared.

However, a debt consolidation loan may be a viable option for you. Debt consolidation means merging all your existing credit (personal loans, hire purchase & credit card balances for example) into a single, larger loan.

A debt consolidation loan can have a number of advantages. First of all it simplifies your finances. If you look at your bank statement each month and see direct debits & standing order payments leaving your account on different days to various lenders it can be confusing. And, unless you have managed to time them all to leave on your payday, you always run the risk of forgetting one. A payment due to leave mid-month, when you have spent the money can be embarrassing.

A debt consolidation loan may also be a cheaper option. If you don’t repay your credit card each month in full, you may be paying interest approaching 30% each year which can be a very expensive way of borrowing – particularly if you can only afford the minimum payment each month.
Whilst banks are currently advertising personal loans at attractive rates, if you have had a personal loan for a while, or have the slightest blemish on your credit file, you are likely to be paying a much higher rate on any balances you have on personal loans. A consolidation loan, particularly if it is a second mortgage, is likely to cost you less in interest each month than multiple loans and credit cards.

A debt consolidation loan also allows you to wrap all of your existing debts and loans into a single loan and repay them over a longer period. If you own your home, you may be able to borrow against the value of it at a much lower rate of interest and repay over a term to suit you, possibly up to 25 years. This can mean that you will be able to reduce your monthly repayments by hundreds or even thousands of £’s. Alternatively an unsecured consolidation loan may still save you money each month – even though the term is likely to be less (and the repayments a little more).

Consolidating your loans like this can also help to protect your credit rating. It does this in by reducing the number of loans you have, repaying existing ones and ensuring that your payments are manageable.

Debt consolidation can help you manage your loan repayments. However, in some circumstances they may not be the answer. For example, where you have suffered a drastic reduction in income, or your debts are just too great to manage, even after a consolidation.

In these circumstances, you may prefer to talk to your existing creditors and ask them for help. If your lenders and creditors know you are struggling they can work with you to find a way of repaying that suits you both, by;

  • Offering a payment break until your situation improves (for example if you are off work due to a period of illness)
  • Rescheduling your payments, or moving the deadline for the payment to give you more time
  • Freezing interest or outstanding charges

Remember, you are never on your own and help is always available if you ask for it.