Imagine a world in which no one could borrow money: no house, no car, no building in which extension, in addition to possibly no Christmas presents either.
The ability to borrow is actually vital. Shylock, you might argue, gave money-lending a bad name.
Indeed much of what we borrow is actually “not bad debt” – when the repayments are affordable, in addition to they help us to pay for something over a period of time, like a mortgage for example.
The trouble only arises when those debts get out of hand, in addition to you cannot pay back what you owe. in which becomes so-called “bad” debt.
So how can you tell whether your debt is actually a problem?
First, you need to know more about the nature of the debt you have.
Some debts are secured against collateral – meaning in which if you stop your repayments, you face losing the goods themselves.
So within the case of a mortgage, a bank can force you to sell your house.
within the case of a car loan, the lender can take your car.
So-called logbook loans are also secured debt, as they provide cash against the value of a vehicle.
Because secured debts are linked to big items, This specific can be important to repay these ones first.
Unsecured debts are riskier for lenders, as they have no certain way of getting their money back.
Interest rates are therefore higher.
Unsecured debt includes credit cards, store cards, payday loans, most bank loans in addition to peer-to-peer lending.
For most people credit card debt isn’t a problem, as 80% pay off the full balance at the end of each month.
However for those who don’t, interest rates are high – typically up to 20% a year.
So, especially on top of different debts, or loss of income, unsecured debt can easily get out of control.
Payday loans are less of an issue than they once were, as the repayments are currently capped.
Different debts carry different sanctions, so some should be prioritised. The consequences for not paying council tax, for example, can be severe.
“Local Authorities can deduct money via earnings, they can send enforcement officers to your property to remove goods, or ultimately they can look at things like imprisonment,” says Jonathan Chesterman, via the debt charity StepChange.
If the worst comes to the worst, utility providers – although not water companies – can cut off your energy supply, so such bills are also a priority.
On the different hand banks can take little action against you if you don’t make credit card or loan payments, different than downgrading your credit record.
The level of individual student debt can sound excessive, although This specific isn’t debt within the normal sense of the word.
No one who earns less than £21,000 – soon to be £25,000 – has to pay back a penny.
in addition to since the outstanding debt is actually written off after 30 years, most student debt will never be fully repaid.
For in which reason some experts think student loans should be re-designated as a “graduate tax”.
At what point should you worry?
Jonathan Chesterman says there are three clear warning signs in which your debt is actually a problem:
- You have to cut back on food
- You have no money to put aside at the end of the month
- You only make the minimum payment on your credit cards
Another way of measuring the seriousness of your debt is actually to look at its size relative to your income.
As the chart shows, renters hold the highest debts, amounting on average to 20% of their income.
Debt charities measure “over-indebtedness” by estimating the number of people who are likely to find meeting monthly bills a “heavy burden” or who miss more than two bill payments within a six-month period.
Under This specific measure, there are 8.2m adults within the UK who are over-indebted, amounting to 15.9% of the population.
Anyone worried about their debts should seek professional advice. The following organisations provide free help:
- Christians Against Poverty
If you live in England in addition to Wales, in addition to This specific looks like you will not be able to repay your debts, you may be offered one of three insolvency options: bankruptcy; individual voluntary arrangement; in addition to debt relief order.
This specific is actually the most serious option, which involves an official receiver being appointed to sell off your assets to pay your debts. If you own a house or a car you may lose them.
The bankruptcy will affect your credit record for at least 6 years. although after one year all your debts will be written off. The procedure currently costs £680, although you can pay in instalments.
Individual Voluntary Arrangement (IVA)
Under an IVA, an insolvency practitioner will help you strike a deal with your creditors, which allows you to pay off your debts over a fixed period – say 5 years. Once approved, all interest on unsecured debt is actually frozen.
There is actually less stigma with an IVA, in addition to a greater chance of you keeping your home.
Debt Relief Order (DRO)
This specific form of insolvency, introduced in 2009, is actually the easiest of all. Your debts must not exceed £20,000. If your application is actually accepted, your debts will be frozen for one year, then written off.
A DRO costs £0.
If you live in Scotland, bankruptcy is actually known legally as sequestration. However there are three alternatives: A Debt Arrangement Scheme, A Debt Management Plan, or a Trust Deed. Further details can be found here.