Recession, credit crunch, house price crash… Of the many emotive words that fill today’s newspapers and conjure up grim images of struggling against hard times, these are probably ‘the big three’ – the financial worries with the furthest-reaching implications.
They’re also the ones that affect the most people. Whatever position you’re in, there’s a good chance you’ll be affected by at least one of these. You may have lost your job or seen your income fall. You may have been unable to get a mortgage or ended up paying a higher rate than you expected. And if you own a home, you may well be worried about what it’ll be worth in a few years.
Of course, these aren’t the only reasons people end up in debt. A lot of people were struggling with their debts long before the recent financial turbulence. If you are in debt, what counts now is what you can do about it. Here are a few ways you could tackle your unsecured debts (credit cards, unsecured loans, overdrafts, etc).
1) Overpay your debts
If you’re left with some spare cash once you’ve paid all your monthly bills, have you thought of overpaying your debts? The way interest works, debts cost more when they’re hanging around for longer, so the faster you can clear them, the cheaper it’ll be – the interest simply won’t have as long to accumulate.
Most people do this by targeting the debt with the highest interest rate and overpaying it by an amount they’re comfortable with each month.
However, interest isn’t the only reason to overpay your debts. The sooner you can clear them, the sooner they’ll stop taking up some of your income every month – so you’ll have more cash to spare, and it’ll be one less thing to worry about if you do run into financial difficulties. Even if you can’t clear them entirely, you’ll still be better off if you can just reduce them faster than you expected.
Just remember that some lenders will charge you if you repay a debt earlier than you originally agreed, so make sure you check the terms and conditions before you do this.
2) Consider debt consolidation
If you’re comfortably on top of your debts but looking for a more effective way of clearing them, have you considered a debt consolidation loan? You could take out a single loan and use it to pay off your other debts in one go.
The benefits? One debt is simpler to keep track of, as you’d start making just one payment per month, making it easier to remember and easier to budget for – and if you can find a loan with a lower interest rate, you could save money on interest.
Some people choose to repay the debt more slowly by arranging lower monthly payments, but if you’re looking to clear your debt as soon as you can, it probably makes more sense to arrange to repay the new loan through payments as large as you can comfortably afford (leaving some leeway for unexpected costs). Again, the faster you can repay your debt, the less it should cost you in interest, and the sooner it’ll stop taking up a part of your income every month. This website has more information on debt consolidation.
3) Consider debt management
If, on the other hand, you can’t afford your minimum payments to your unsecured debts, you might want to consider a debt management plan.
It’s an agreement with your unsecured lenders. You (or the debt management company you’ve asked to work for you) would contact your lenders, tell them can’t afford your monthly payments and ask them to accept lower payments. The idea is for those payments to be set at a level that’ll leave you with enough for your essential costs, from your mortgage or rent payment to your utility bills, transport & food costs.
You’d basically be paying as much as you can afford without using funds you really need to keep for your essential living costs.
Just bear in mind that lenders don’t have to agree to this – and that repaying your debts in smaller instalments (more slowly) means you’re not sticking to the original repayment terms and as a result your lenders may issue a default notice, which will show up on your credit report, potentially making further credit harder and/or more expensive to come by. It can also cost you more in interest, although lenders often agree to freeze interest while someone’s on a debt management plan.
Having said that, damaging your credit rating and paying more interest are risks anyway if you can’t afford to repay your debts as agreed – they aren’t risks that are created by entering a debt management plan.