Hello and welcome to Finder's financial self-help series where we swap scented candles for sage money tips and advice. Check it out. Most of us have been raised to think that debt is
a dirty word, when in reality, unless you’re one of the lucky few, debt is just another part of
life. In this video, I’ll talk you through some of the most common types of debt and some tried
and tested ways to get it under control. Debt is money you owe usually to a bank, credit
card provider or some other type of lender. You get in debt when you borrow money or buy
something using credit. There are interest-free credit deals around, but typically, when you
borrow money you’ll be charged interest so make sure you factor that into any repayments.
Some of the most common forms of debt include mortgage debt, credit card debt,
personal loan debt and business debt.
A mortgage could see you borrowing hundreds of
thousands of pounds , so this will likely be the biggest debt you’ll have to deal with throughout
your life. Because the debt is so large, your interest charges will add up to a pretty
significant amount over your life.
And because mortgage debt is typically paid off over many
years, financial discipline is essential.
Whether it’s buying a car or paying for a
wedding, a personal loan can be used for just about anything. Where a loan is secured against an
asset, like the car you purchased with the loan, you could risk it being repossessed by the lender
if you don’t keep up your payments. Short-term, payday loans charge extremely high interest
rates and should only be considered as a last resort if you have no alternatives.
A form of lending that’s boomed across the UK in recent years are buy now, pay later schemes.
Depending on the provider, these services allow you to choose from a variety of plans to repay
your shopping balance over a longer period of time or in smaller instalments.
Be aware
that some plans charge interest and late or missed payments could impact your credit
score, so make sure you carefully consider the right plan and service for you.
If you’re running a business, buying stock, expanding into new markets or
hiring a bunch of new people, often involves borrowing money. So when it comes
to business loans, business credit cards or other overheads, sometimes the old adage holds
true: you gotta spend money to make money.
To help you get on top of your debt, we’ve set
out actions you can take and sources for help, for three levels, from minor
through to serious problems.
The first tier is for people who find
themselves in a small amount of debt but who want to take some smart, responsible
changes today to better manage their payments and get on top of interest charges.
One approach could be to consolidate or transfer your balance onto a balance transfer card with
a low or 0% interest rate for an introductory period, like 6, 12 or even 20 months.
A one-off
balance transfer fee usually applies and, be aware, that once the introductory period
is over, the interest will revert to a higher rate – so, try and use the low or 0% interest
window as a deadline to pay your balance off.
If you’re struggling to manage one or multiple
credit card debts, try adjusting your payment plan. Focus on paying one card off at a time,
try and pay more than the minimum each month, pay off your balance in weekly instalments
and prioritise your credit card repayments as soon as you get paid.
If you’re paying interest on multiple debts and you’re struggling to make repayments, you
could consider consolidating your debts – perhaps with a debt consolidation loan or even by
remortgaging.
This way you could end up with just one monthly repayment and potentially lower
interest rates. Just be aware that consolidating short-term debt into, say a 30-year mortgage
might be cheaper and more manageable for you month-to-month initially, but would likely
work out a lot more expensive overall.
If you think any of these options
are the right move for you, make sure you compare a range of loans and lenders
and only borrow from a reputable lender.
If your debt is starting to feel unmanageable
and the above solutions won’t do the trick, it could be time to speak to a debt advisor
to work out a debt management plan.
You can get free help from the charity StepChange.
You could also consider using a debt management service – but this will come with a fee.
You’ll
make monthly payments to your debt management service, which then distributes your funds between
your creditors, effectively consolidating your loan. With a debt management plan it may also be
possible to suspend interest on your debt.
Before you choose a paid-for debt management
plan, it’s sensible to contact your lender directly and explain your circumstances.
Ultimately, they want to get their money back, so they might be able to freeze a few payments
or work out a plan with you individually.
Tier 3 are your insolvency options. This
is your last port of call for when your debts have truly got on top of you and none
of the other solutions are available.
These options include individual voluntary
arrangements for larger debts typically over £10,000-£15,000, where you pay an insolvency
practitioner who then distributes the funds between your creditors. Administration
orders for debts less than £5,000, where your local court will act
as the insolvency practitioner. Debt relief orders, which are an alternative
to bankruptcy. And bankruptcy itself, which is a court order that declares you
legally unable to repay your debts.
Due to a difference in legislation, these
insolvency options are only available in England, Wales and Northern Ireland.
In Scotland,
instead of an IVA you have a Trust Deed, a minimal assets process is similar to a
debt relief order and a sequestration is the Scottish version of bankruptcy.
In some cases, any interest or charges on your debt will be frozen during your
arrangement or your debts will be cleared. These insolvency solutions are absolutely a
last resort, though, as they can have long term implications for your future borrowing power
and will seriously affect your credit score.
For more information on managing your debts
effectively head to finder.com.
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coming up. As always, thanks for watching..