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It is a commonly known fact that the average adult person living in the UK today has a higher level of personal debt through personal loans and credit cards than at any other time previously and the overall level seems to be increasing at an alarming rate.
In many cases, these debts can be spread across a number of different creditors and could include things such as a homeowner loan, or mortgage, a couple of personal loans and maybe three or four different credit cards and store cards. Even when times are good and the economy is strong creating good security for employment prospects, it can be a daunting task managing all the different bills which land on the doorstep each month, ensuring that everything gets paid on time.
But with the onset of the credit crunch and recent slow down in the UK economy leading to recession, and worries over job losses, unemployment and reductions in overtime and bonus payments from employers, large monthly repayments on outstanding loan debts can be a real worry and many people are now changing their attitude towards their personal debt levels and making a serious attempt to reduce their personal loan and credit card balances significantly, or even pay them off completely.
Those individuals who are lucky enough to have sufficient spare cash each month, in many cases are now realising just how vulnerable their situation could be if their income were to stop suddenly and are making extra efforts to clear their outstanding personal loans and credit card debts as quickly as possible, in order to reduce their committed monthly outgoings.
Despite the fact that the base rate of interest on homeowner loans and mortgages has dropped significantly over the past few months, thereby reducing many borrower’s monthly outgoings, this is not the case when it comes to personal loans and credit card rates, which have continued to remain at their previously high levels and with many individuals seeing a drop in their regular income, these are usually the debts which cause the problem with the monthly budget.
When borrowers have several outstanding loans and card balances, it is quite common for them to apply for a debt consolidation loan, which combines all their outstanding debts into one loan with only one monthly payment. Although this can save a great deal of money in monthly payments, allowing a person to have more disposable income each month, in the long term this option can often end up costing the borrower more than their original debts would have done, as usually the payments are spread out over a much longer term, with interest being charged for a longer period and therefore costing more in total, even though the monthly payments are less.
This option is fine for someone who needs to reduce their outgoings each month, but for someone who wants to clear their debts as quickly as possible, it is only extending the repayment period.
So where should a person with a variety of personal loans and cards start when they seriously want to clear their debts?
Firstly, it is important to ensure that each of the creditors receives some level of payment each month, even if this is only the minimum amount, as this ensures a clear credit record for the borrower in the future. The person should then check each one of their credit agreements carefully, whether it is a loan or a credit card, to confirm what the rate of interest being charged is on each debt and whether this interest is added on a daily basis, annually, or all at the outset of the loan.
If a personal loan has had all the interest added at the outset, there is little point in paying this off early unless the loan company offers a discount for early repayment. In some cases a lender will actually charge an additional penalty for repaying a loan early and the borrower should be careful to check the small print to see if this is the case and how long it applies for. If in any doubt, contact the company who provided the loan in the first place.
Assuming that there is no disadvantage to repaying any one particular debt first, typically those commitments which charge the highest rate of interest should be the first ones to be cleared. Under normal circumstances these tend to be store cards, mail order catalogues and credit cards. The rate of interest charged will be shown on the monthly statement.
Where there is more than one interest rate charged, for example on a credit card which charges different rates for purchases, cash advances and balance transfers, the balance which is being charged at the lowest rate is cleared first. This is an important area to note for someone who may be considering a zero per cent balance transfer onto their credit card, if they already have an outstanding balance on the card, charged at a higher rate, none of this debt will be cleared until the interest free element has been fully repaid.
Apart from this trap, balance transfers can be an effective way of reducing interest payments on other debts and clearing them faster, as the full amount of the monthly repayment will be used to clear capital, not interest.
Once credit card balances have been cleared (apart from zero per cent interest elements), the next most expensive form of credit are normally unsecured loans. These may have lower repayment amounts and smaller balances than secured loans and mortgages, but the interest rate charged is usually considerably higher, as this type of loan presents a greater risk for the lender than a secured loan would.
As various outstanding debts are cleared, it is important to redirect the savings made towards the next most expensive loan or credit card, continuing down this route until all debts have been cleared. It may seem like a long way off at first, but it will happen eventually (honest!!) and those individuals who are most focused on channelling funds back into repaying their personal loans will , not surprisingly, be the first ones to become debt free.
If someone is in a situation whereby they can not afford to make all their loan repayments each month, firstly they should contact each of their lenders to arrange reduced repayment levels wherever possible. If this is still not sufficient to manage regular payments, then it makes sense to keep up with the repayments on any secured loans first, as these are the only ones which can cause a person’s home to be repossessed. Any arrears and defaults, should be allowed to build up on unsecured loans and credit cards first, although this should of course be avoided wherever possible.
Finally, if after reading this article, you are in any doubt as to what course of action to take to clear your loans and other debts, there are several services and organisations which are able to offer help and advice on a one to one basis, many of which are free of charge.
Independent financial advisers, debt counsellors, debt management companies can all give advice, but may charge for their service. For general advice on debts charity organisations such as the Citizens Advice Bureau (CAB) can provide an excellent service for no cost. If you are serious about clearing your debts, take some professional advice, develop a repayment plan which is manageable and realistic, write it down and place it somewhere where you will see it every day and then stick to it until you have achieved your goal of becoming debt free.
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