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Most of the population of the UK have been in debt at some time or other in their lives, even if they currently don’t have any commitments outstanding. Whether it is in the form of a mortgage or homeowner loan to buy their house, a personal loan to buy things such as a new car, or a credit card for use in emergencies or day to day shopping expenses, the majority of us have experienced being in debt to some degree or other.
But recent surveys have shown that the total level of debt in the UK is growing dramatically, some reports claim that consumer debt on loans and cards is growing at a rate of £1 million every ten minutes and that the average adult in Britain currently has in excess of £30,000 of personal debt (including outstanding balances on homeowner loans and mortgages). So it would appear that we have become a nation of borrowers, with some individuals obviously taking out loans and other credit agreements at an alarming rate.
Whether or not someone is considered as having a large amount of debt is, to a certain degree, relative to their own personal circumstances. This would include taking into account things like the level of earnings that particular person may have, to fund the repayment amounts each month, or what level of assets the person may own which could be used as security against the outstanding loan amount.
For example, if someone was making monthly repayments on a personal loan of £500 perhaps, is this a high amount? Clearly, if the individual in question only has a take home pay of maybe £800 per month, then this is an extremely large amount of personal debt, however if the repayment amount is perhaps only ten per cent of the persons take home pay and they have assets such as a car and a large amount of equity in their home to cover the outstanding loan balance, then the situation doesn’t seem to be quite as serious and the borrower is unlikely to be concerned about the level of debt.
The problem which we are currently facing, due to the credit crunch and the global economic slow down, is that earning levels are not guaranteed and unemployment is on the increase, whilst at the same time assets such as houses in particular are losing value, thereby reducing the level of a homeowners equity.
So, to revisit the example used above in the current economic climate, the borrower with a good income may lose their job, causing problems with having sufficient income to meet the loan repayments, whilst at the same time the equity in their home has been reduced through falling house prices and nobody is prepared to buy the car, as the market is currently flat. This may seem like an extreme demonstration of what can go wrong, but in reality this is just the sort of thing which can and does happen all the time.
In other cases, individuals simply borrow money in order to buy the things which they can not afford. This may start with small purchases on a credit card and rather than paying the balance off in full each month, minimum payments are made, thereby leading to a balance building up quickly.
Before the borrower knows where they are, the card is up to its credit limit. At the same time the same person may have a personal loan to purchase a car and a few store cards for those weekend shopping trips, because you’re not really spending money if you’re putting things on your card…are you???
All of a sudden, this individual finds him or herself with a huge problem. All those small purchases they made on their cards, the odd CD here, a pair of shoes there, have all built up to a level where all their cards are “maxed out” and they have an insurmountable level of debt which they have absolutely no way of being able to repay, in many cases they will struggle to even keep up with the minimum repayment amount each month.
So what is the answer for someone who finds themselves, for whatever reason, in a large amount of debt which they are unable to manage? The first option may be to look for a debt consolidation loan to bring other debts together in one repayment amount with a lower interest rate. This can save a large amount of money in monthly repayment amounts and also ensures that the debt is repaid over a fixed term, rather than making minimum payments which only realistically cover the monthly interest amounts.
Another option for someone with credit card balances is to apply for a zero per cent balance transfer card, which can save interest over a fixed term, but repayments must still be kept up to date. Anyone taking this route must remember that their debts have not gone away, they have simply been moved elsewhere and it is vitally important that additional debt is not run up once again. Cut up any existing credit and store cards and only spend what you can actually afford each month, to avoid falling into the trap again.
For someone who may have fallen behind with their personal loan and credit card repayments and may have outstanding arrears, a debt consolidation loan, or a zero percent credit card may not be an option as these will often not accept anybody with a history of bad credit.
In this case it may be necessary to enter into a debt management scheme. For a monthly fee, a debt management company will deal with all a person’s creditors, negotiating minimal monthly repayment amounts at reduced interest levels and in some cases, getting final settlement figures reduced by lenders.
In exchange for this service, the borrower makes one monthly repayment to the management company, who in turn pay the various creditors. For someone opting for this route, it is unlikely that they will be able to get any further credit on cards or loans until the original scheme has finished and the debt has been repaid. If things are extremely serious and there is no other way out, the final option for someone with debts is bankruptcy, but this is an extreme measure and should be avoided wherever possible.
For someone who may have debts which they are finding quite manageable at the moment, but may be concerned about unforeseen eventualities in the future, such as unemployment, or long term sickness, there are a number of insurance products which can cover loan and other debt repayments and balances.
These include, payment protection insurance (PPI), critical illness cover, permanent health insurance and of course, life cover. These policies all cover different things and one individual policy is probably not adequate to cover every possibility. For anyone who has outstanding personal loans or other debts which are unprotected, the best course of action is to have a meeting with an independent financial adviser (IFA) who can advise you on the various products available and which ones are best suited to meet your specific needs and requirements.
Of course, the best piece of advice with regard to getting into debt is quite simple…don’t do it! Think before you spend money on a credit or store card and ensure that you pay off the full amount of the outstanding balance each month, so that balances do not build up.
Before applying for a personal loan ask yourself if you really need the item in question, do you need to borrow as much as you are intending to, would it be more appropriate to save money over a few months to get the amount you need, can you afford the monthly repayments, not only now, but next year and the year after that and is the loan adequately protected in the event of something unforeseen happening to you?
Remember, every penny you borrow has to be repaid at some time, plus interest and borrowing for short term pleasures and luxuries can mean many years in tough repayments!
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