Unsecured Lending & Loans

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In (Part 3) of this series, we looked at how someone could go about properly assessing their financial position by setting out their income and expenditure situation to provide them with the information they would need for keeping their finances under control. The process we suggested would highlight any areas of unnecessary overspending and provide the information that would allow them to take any necessary action to reduced that overspending and return their finances to a comfortable position where their income outstrips their outgoings by a comfortable margin.

What this article attempts to do is to look at some of the things that can account for level debts to build up and become a concern or even grow to a level that becomes uncontrollable. Where anyone is finding themselves getting into this situation then we hope this article will provide food for thought on the type of action that might be taken to relieve matters.

Please take note that although some of the debt relief solutions that are discussed here will be easily handled by most people, others, particularly those where the debt has been secured on your residential property and will be subject to regulation by the Financial Conduct Authority (FCA), may require professional assistance to resolve. Where this proves to be the case, care must be taken to ensure that they are properly qualified people who hold the necessary authorisations and meet the regulatory standards required by the Financial Conduct Authority.

Types of debt producing products

The following paragraphs take a look at some of the more commonly used ways products that can cause a build up debt and how this may affect the unwary.  Unfortunately there are just too many things that can cause a build up of debt that it is impossible to list them all here, so we have restricted our coverage to the more obvious ones.

• Credit cards and debit cards – Most general purchases are now being made through the use of these types of cards which means that unless a daily record is kept, what is spent during the month is not seen until either the credit card bill or the bank statement arrives through the door.  These two types of card are very different, as explained below.
• Debit Cards – These are cards issued by your bank which allow you to make purchases that that are charged directly to your bank account. In theory, you can only spend what you have in your bank account, unless you have set up an overdraft facility with you bank. If you overspend, your bank balance will  decline and this may result in you being unable to pay other debts that you may have.
• Credit Cards – This type of card is designed to allow users to purchase items up to a maximum limit set by the card provider, which in theory is set at an amount which is supposed to be affordable for the card holder but which in fact has no real bearing on the card holders true financial position.These cards charge very high interest rates, often as much as 25% APR on the outstanding debt that has been built up and because they only require a small repayment to be made each month, it is easy to overspend and build up debt to the cards limit. It is not uncommon for individuals and families to hold a number of these cards and we often see clients who have built debt on these cards to the tune of many tens of thousands of pounds.

Controlling  your spending on credit cards

If you have let your debt on credit cards reach concerning levels or let it get out of control, you should stop further spending immediately and take stock of your options to reduce or clear these debts. Here are 4 steps to take:

1. Check what you owe on each credit card you hold and ascertain the interest rate that is being charged on each card.
2. Concentrating on the credit card with the highest interest rate, pay as much as you can, over the minimum amount, to ensure that the debt on this card is reducing each month and keep that going until the debt has been cleared. During this time, ensure that you maintain payments on your other cards at a level that ensures the debt on those cards does not increase. When the highest interest debt has been cleared, repeat the same process with the next highest interest card and so on, until all credit card debt has been cleared or brought to a comfortably managed position.
3. When step 2 has been accomplished, it would be wise to ensure that there is no repeat of the problem by disposing of any surplus cards and only holding one card, which is never again allowed to build to an unmanageable debt.
4. If steps 1 and 2 cannot be afforded and you own assets of sufficient value to cover those debts, then it may be possible for you to restructure your debts by using these assets to secure a low interest loan that can then be used to take out all of the debts on the expensive credit cards. This could reduce your monthly expenditure to manageable levels.

Buy now pay later debts

We include here all items bought under hire purchase agreements, buy now pay later agreements and cars loans purchased under the various contract deals that most people now use to purchase their cars.

It is not uncommon for households to have a string of these types of debt which taken together can amount to quite serious amounts of money. When these debts rise to uncomfortable levels then it is time to take action.

Controlling debt spending

In the same way as shown for credit card debt, if you have a number of these types of debt contracts then it is important to know what they are and what they committed you to spend in the coming months or years. Here are 3 steps to take:

1. The first step is to set them out on a time chart with each loan contract individually listed and showing the monthly repayment over the time left to repay. The totals for each month will then tell you what your monthly outgoings on these contracts will be. If using our ‘free Income and expenditure spreadsheet’ then this is all set out for you and all you have to do is enter the monthly payments.

To learn more about this spreadsheet and request a copy, please see Part 8 of this series.

2. If the overall monthly cost of these items is going to cause you problems going forward, such as perhaps causing you to default on one of the debts, then finding a way to reduce the payments is needed as you will want to avoid having your credit score adversely affected.

To do this, make a list of the items that are not deemed to be essential and then check these contracts to see if you can end the contracts early. As most items will have been used, it is unlikely that they can be returned. However, in the case of items like cars, it may well be possible to terminate your contract and as cars can be very expensive, terminating and obtaining a cheaper car may work.

3. If none of the contracts can be terminated and everything is actually needed, then the next thought would be check if it would be possible to restructure these debts.

In the same way to what was mentioned under credit card debt, if you own assets of of sufficient value to cover these debts then it may be possible to restructure them by using those assets to secure a low interest loan that can then be used to pay off these loans. This may reduce your monthly expenditure to manageable levels.