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With student loans, credit cards, overdrafts, personal loans and mortgages, being in debt seems to be a normal part of modern life.
The average household credit card, personal loan and overdraft debt (not including mortgages) had increased to £13,520 by the beginning of 2016, up by 40% on six months earlier, according to Aviva.
Are you thinking about taking out a loan or credit card?
Always check the interest rate on offer and calculate what your monthly and total repayments will be - you should always be told this upfront before you take out the credit or loan.
Keep within your lender’s repayment terms, or you might lose any promotional interest rate.
Make a budget showing your current regular income and outgoings, and ensure the repayments will not push your outgoings above what you earn.
If you don’t have a payback plan sorted, you may end up worse off. You may need to take on new, often more expensive debt, to meet the repayments on the old debt on top of your essential outgoings, such as food, rent/mortgage and electricity.
A reduction in your income or an increase in interest rates can suddenly make it harder to meet your repayment plan. This is what people refer to as “the debt spiral”.
Staying safe with debt
Make sure you stick with your plan and aim to pay off as much as you can each month to reduce the balance more quickly. The lower your monthly repayments, the longer it will take.
Don’t be tempted to take advantage of every offer your credit card or loan provider sends your way – or to spend up to your limit just because you can.
Remember that loan repayment periods can span years. Will you definitely be able to afford the same monthly repayment in five years’ time? Try to keep repayment periods as short as possible to avoid being locked in for a long time.
It’s got out of control…
If you didn’t stick to your plan, here’s what to do:
Don’t panic. Panic can result in snap decisions to take out ultra-high interest loans from “payday” lenders or consolidation services that promise to wipe out your debts, but can leave you saddled with a lot more.
Try not to leave it too late to ask for help. Speak to the lender. A good lender will listen to your circumstances and help you to come up with a more manageable repayment schedule.
This can be particularly helpful if you know your income is going to be low for two or three months, when you would struggle to meet repayments, but then will go back up again. They might be able to reduce or even stop repayments temporarily for you. Be prepared for a few long phone calls, though.
Free advice is out there for you, you don’t need to pay
Take care, when you are seeking advice, to use an independent, free service.
There are dozens of debt advice charities who can listen to your particular circumstances, recommend some actions and even step in and speak to lenders on your behalf. This can be helpful as everyone’s circumstances are unique.
If you get into difficulty repaying debts due to ill health, then charities representing people with your illness often have wisdom to pass on from others who have been in the same situation.
Mind, the mental health charity, has a support section for those suffering from mental ill health and struggling to meet repayments.
Macmillan cancer support has an excellent section on managing your finances after a diagnosis.
Online forums can be a good way to seek help and support, but an online search can result in you landing on pages run by debt management planners or consolidation services rather than advice services. These services can be helpful but should not be your first port of call as they charge fees for managing your debt for you.
Managing debt when it goes out of control
Spreading your debts over a longer term can result in smaller monthly repayments. This makes repayments more manageable, but results in a larger interest burden overall.
Consolidation – bringing all your debts together into one loan arrangement – can sound like a good idea as it can be easier to keep up with one repayment rather than several. However, these plans can also result in a higher rate of interest being paid, increasing the overall cost of your debts and tying you into repayments for longer.
Sometimes, Individual Voluntary Arrangements (IVAs), which re-structure your debt, freeze interest and sometimes write-off some or all of your debt, can be arranged, if it is judged by your creditors that there is no other way for them to get their money back. But such arrangements can have a big impact on your credit record.
If there is absolutely no other way out and no way for you to repay your debts, then bankruptcy becomes the only option. This is becoming less common, thanks to the increasing success of ways of negotiating with lenders. So the good news is this is an unlikely end to your debt journey.
Paid it all off?
Well done. There is always a way back to financial health – so take heart. The road can be long, but it does have an end.
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money. Find more Money Means news here.