Thing to consider when taking out debt

We ask Jonathan Watts-Lay, Director, WEALTH at work some of the things that people should consider when taking out debt.

He comments; “Debt comes in many forms such as loans, credit cards or store cards. It is always something which needs to be carefully planned for and understood before it is undertaken, so it’s never a good idea to borrow on impulse. Debt always needs to be carefully managed, as it’s only when repayments become unmanageable or unaffordable that it becomes a problem.

Many people use credit cards and there are many different types available for different needs. Common offers include 0% finance on all new purchases, 0% interest on balance transfer from other credit cards and cashback or points that build up on purchases. Some money purchase cards allow you to pay off other debts, such as an overdraft, when you take out the card, and if you have an existing card with a high interest rate, it might be a good idea to transfer this balance to a credit card with a lower interest rate. It’s useful to know that if you’re making a purchase using a credit card, you get the added benefit of ‘section 75’ protection for purchases over £100 and under £30,000, which means if something goes wrong with your purchase, the credit card company is there to help.

Generally, many people may not realise the varying levels of interest that different debt providers charge.  Credit cards and overdrafts may have rates as high as 40%, with payday loans having rates of 1,500% and more! By shopping around you may be able to move to a lower interest rate, and some credit cards even offer 0% on balance transfers. If you have multiple debts, it could also be a good option to consolidate these into a 0% or low-interest balance transfer card, as more money will go towards paying the debt off.

When paying off debt, it is usually best to do this as quickly as possible as generally a longer-term loan means more interest payments. For example, a debt of £3,000 with a rate of 18% APR, could take 10 years and 10 months to pay off if paying £50 a month, with a total interest paid of £3,495. If that monthly payment was increased to £100 a month, the debt would be paid off in three years and four months, and the interest paid would be £908.

When you are looking to take out a loan, it can be equally important to look at the term of the loan as it is to check the loans APR.  It is the combination of these that will determine the total interest you will pay on the loan.  In some cases, loans with lower APRs may not be as attractive if they tie you into long repayment terms.  For example, a £10,000 loan with an APR of 6% that is repaid over 10 years would cost approximately £3,200 in interest.  The same loan with a higher APR of 7% that is repaid over 5 years would cost approximately £1,800 in interest. Clearing a loan over a shorter period of time can reduce interest costs, however, monthly payments will be higher. It would be important to consider if you can afford to make these payments before committing to a loan.

It is important to ensure that all debt repayments are made on time. For example, if the minimum payment is not made on a 0% credit card, the 0% offer could be withdrawn for breaching the terms and conditions of the offer, and interest could be charged on the whole of the balance. Make sure you speak to your provider if you are unable to make a payment or forget as they may be able to look for ways to help.

Also, ‘buy now pay later’ deals which allow you to spread the cost of items without paying interest if you repay on time, can be tempting. However, paying late can mean much higher charges. Terms, interest rates, charges and timescales can vary with buy now pay later providers, and they are not currently regulated in the UK, so make sure you check the small print.”

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For anyone who is struggling with debt, many employers offer Employee Assistance Programmes (EAP) that includes debt management support. This support often ranges from budgeting advice to establishing the root cause of someone’s debt issues. These types of services can be very helpful as they provide impartial third-party advice that is completely confidential. You can also contact free services such as MoneyHelper, Citizens Advice or National Debt Line.