Your Guide To Debt Management
Taking on a debt is fairly easy. Managing it is very tough. A loan or debt is a risky thing, that’s why many people don’t prefer it. But, this is not always possible. There is no need to fear taking out a loan. If you know debt management, you will become a responsible borrower and have everything you want. But first, you need to work out your incomes and find out whether you can afford a debt or not.
Do I Need To Borrow At All?
Before you work out how much you can afford to borrow, think, “Do I need to borrow at all?” Usually, people borrow for buying assets like a house and car because they are very expensive. But, for relatively cheaper items like home appliances or furniture, using savings or bad credit loans no guarantor is your best bet. There are also other questions you should ask yourself: “Do I need something on a short notice?”, “Can I wait long enough to buy it with my savings?” and “What if prices rise in future?”
How Much Money Can I Afford To Borrow?
If you feel the need to borrow, then go ahead with it. Before starting out on your hunt for a lender, you should sit down and try to get a realistic idea about your finances. This means that you should have a clear idea about how you’ll go about with debt management. You can’t use 50% of your salary just to make repayments. That would leave just 50% for your savings, household expenses and the odd splurge. Think how you would manage if your mortgage expenses went up or your pay was cut.
How Do I Choose The Right Type of Credit?
There is no right or wrong type of credit. It’s upto you to decide what kind of loan is suitable for your situation. If you want to buy property, a mortgage loan is suitable. Whereas if you want to buy a car, you can choose a Hire Purchase or Personal Contract Purchase (PCP) form of finance. To talk about the two main types of loans, unsecured personal loans are often better than secured loans. There are two sides to a coin. You have to check whether you’ll be able to do debt management. Compare deals on the basis of:
- Interest rate and APR (interest plus fees & charges)
- Your total repayment (principal plus interest)
- Penalties for missed or late payments
- Fees for clearing the loan off early (exit fees)
- Cost per week or month
Note that if you have a bad credit score, a loan shark may offer you an enticing deal. A loan shark is an individual who is not authorized by the FCA to lend money. They are dangerous people and often demand money whenever they like. Some even take to physically and emotionally hurting borrowers. If you notice anything suspicious about a lender, avoid them. If you’re caught in the web of a loan shark, the immediate thing to do is report them to the police.
Tips To Debt Management
There are some clever tips and tricks for debt management. Read to learn more about them.
For successful debt management, you should prioritise your debts. That means you make a list of your debts with priority debts on top and non-priority debts further down. You should do this if you’re struggling to pay off your debts. Priority debts can lead to serious legal problems if you don’t pay them e.g. court fines, Council tax, Income tax, mortgage, etc. Non-priority debts, on the other hand, can lead to less serious consequences. But they have to be paid eventually- after you pay off priority debts. Examples are personal loans, money from friends and family, credit card, payday loans, etc.
IVA stands for Individual Voluntary Agreement. This is another way of debt management. If you have a little money to pay to your creditors but not the full amount, you can opt for IVA. An IVA freezes your debts and you can pay it back over an agreed period. Even if you owe something after this period, you don’t have to pay it. To qualify for an IVA, you need to show that you have a lump sum or some form of long-term income. It is set up by an Insolvency Practitioner. With an Individual Voluntary Agreement, you can pay overdrafts, personal loans, Council Tax arrears, Hire Purchase debt, mortgage, credit and store cards, and income tax.
With a Debt Management Plan, you make a single monthly payment to your DMP provider who then pays your creditors on your behalf. This plan reduces your debt to a rate you can easily afford. Remember that you can use a Debt Management Plan only for non-priority debts like overdrafts, bank or building society loans, the money you owe friends and family, loan on your credit card and catalogue debts to name a few.
Administration Order is the fourth type of debt management. You can apply to County Court for this if:
- Have at least two loans
- Owe a sum under £5,000
- Have at least one County Court Judgement (CCJ) or Higher Court Judgement in your name
- Can afford to pay your small (sometimes as low as £1 per debt) but regular debt payments
If your Order is approved, you don’t have any dealings with your creditors. You make payments to the Court which will distribute it among them.
You might be able to apply for a Debt Relief Order if :
- The debts you can pay off with this are less than £20,000
- Your savings are not more than £1,000
- You have less than £50 in hand every month after paying living expenses
- You lived, owned a property or did business in the last three years in England, Wales or Northern Ireland
A Debt Relief Order allows you to freeze your debts for a year. If you’re still low on assets and income after a year, your entire debt is written off.
Good Debt versus Bad Debt
These are two important terms in debt management. In simple terms, with a good debt, you stand to gain financially in the long run. And it doesn’t have a negative impact on your financial situation. A good debt is usually taken for a long-term investment. It is a loan you can afford to repay given your incomes. Your motive for taking a good debt is clear and you are confident you’ll be able to pay it back as quickly as possible. In some cases, a good debt is a loan that comes cheap. Examples of good debt are student loans, mortgage, startup loans, and car finance.
A bad debt is a clear case of poor debt management. It leaves you in a financial abyss and takes a toll on your mental health. You find that you owe much more than what you had borrowed. They are not even worth taking in the long-run. It is plain insensible to take on a bad debt. People often get into unhealthy loans when their repayment plans are not realistic. They’ve not thought it through. Some examples are:
- An extravagant holiday you can’t afford:
You need to assess your financial situation before going all out. It’s easy to borrow but very difficult to repay. A luxury holiday may last a week, but a bad debt as this will last a lifetime.
- A new car you don’t have much need for:
Suppose you have a spouse and kid and travel a lot on business. Your salary is also increasing. The neighbour bought a shiny new car last week. You wish even you had one so you take out a car loan. However, as you are hardly ever there at home, your family doesn’t use the car much. It’s been unmoved for weeks, yet you’re making repayments. This is also a case of bad debt management. When he didn’t need the car, he shouldn’t have taken a loan for it.
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