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The effects of the recent credit crunch have had a significant effect on the day to day finances of many individuals in the UK.

Many people who were previously unconcerned about their financial situation and were quite happily managing their personal loans, credit cards and mortgage or homeowner loan, along with all their other regular household bills, have suddenly found that due to circumstances beyond their control, possibly through a reduction in their regular household income due to job loss or a pay cut or due to a lack of available funding through a new debt consolidation loan, they are now struggling to keep up with their various loan repayments.

Although there are now the first signs starting to show through, that the UK economy may be on the mend, albeit slowly, for many people the damage has already been done and many borrowers are now facing problems with loan arrears and possibly worse.

Even for those people who have managed to keep their heads above water throughout the current economic crisis, the events of the past couple of years has brought home to them the fragility of their financial situation and many have realised that they cannot simply rely on their large monthly salary to always be there to cover their loan repayments and other monthly bills. This has provided a wake up call for many individuals who have taken the decision to review their finances on a regular basis and clear their outstanding personal loans and credit card debts, thereby freeing up extra monthly disposable income, which in turn may be used to build up some level of savings as an emergency fund, or financial safety net.

For anybody who is serious about actually clearing their outstanding personal loans and credit card balances, where to start can sometimes be a daunting prospect, depending on just how many different creditors there are to deal with.

As a starting point, it is always a good idea to put together an income versus expenditure plan. This should list all your income including salary, any secondary income and any benefits for which you may be eligible. If you have a joint household income, you should sit down together and carry out this exercise on a joint basis. Once your income is listed, then set about listing all your monthly expenditure. For utility bills which may be paid on a quarterly basis, work out the monthly equivalent and use this figure. It is vitally important to list all your outgoings, not just your loans and card payments, so include utility bills, food and travelling expenses along with the cost of regular leisure activities.

If done in enough detail, this should provide an accurate figure of just how much disposable income there is left at the end of each month, some of which may be redirected to repay loans and cards. This exercise is also useful as it may highlight certain areas where savings could be made instantly. Writing things down in an organised fashion will make the situation look a lot clearer than simply sitting looking at a large pile of paperwork from various organisations wanting money from you!

Once you have ascertained your disposable income, make a list of all your various credit agreements, including your mortgage, secured loans, unsecured loans, credit cards, store cards and overdrafts. For each of these write down the outstanding balance, remaining term (if applicable), monthly repayment amount and the interest rate being charged. Once again things will seem a whole lot clearer once they are written down.

Usually it makes sense to focus on those debts which are charging the highest rate of interest first, as this will save you the most money in the long term. This is most likely to be overdrafts and credit and store cards, although some credit cards offer zero per cent, particularly on balance transfers, for a limited period, so look carefully at these rates. Once credit cards have been cleared, usually the next most expensive form of credit is likely to be unsecured loans, then secured loans and finally, mortgage or homeowner loans.

Most of these types of loan will allow the borrower to make regular overpayments, but beware of early repayment penalties, particularly in the early years of a loan, as these could cancel out the benefits of overpaying. In this situation it could be more cost effective to make overpayments on a cheaper loan, rather than waste cash on repayment penalties. Any charges and penalties will be listed in the original loan agreement, which should state how much they are and how long into the term of the loan they will apply.

Although in the majority of cases, repaying the most expensive debts first is the best course of action, sometimes it could be beneficial to clear an outstanding small loan or card balance, even if this at a cheaper interest rate than some other commitments. If a loan or credit card has a reasonably small balance outstanding, it will be easier to clear fairly quickly. This will have the effect of removing one of your monthly commitments from the equation altogether and will also free up some more disposable income to redirect to other areas. This could be a particularly useful exercise for somebody who may be close to their financial limit on their income/expenditure budget, who needs to reduce monthly outgoings as quickly as possible.

Another popular option for someone with a number of credit agreements is to apply for a debt consolidation loan. This has the benefit of rolling up all a person’s various debts into one regular monthly payment, usually at a lower interest rate than they were previously paying and very often at a much lower monthly repayment amount.

There can be drawbacks with this route however. Firstly ensure that the interest rate on the debt consolidation loan is lower than those being charged on your existing debts, otherwise there is not a lot of point in taking this course of action. Secondly, if the term of the new loan extends beyond the repayment dates of the original debts, interest will be charged for longer and the loan could cost you more over the term, even if the monthly repayments are significantly less than your combined previous debts. Thirdly, it is important to repay outstanding debts with the new loan and then do not re-use your credit cards. Many people fall into this trap and end up with double the amount of debt than they started with. With a debt consolidation loan, you have not cleared your debts, you have only moved them all to another place!

If you are having difficulty in organising your debt repayment plan yourself, there are plenty of places which can offer assistance. There are various charitable organisations such as the Citizen’s Advice Bureau (CAB) who offer free debt advice. Independent Financial Advisers can also provide assistance, although they are more likely to charge a fee for their professional services. Even the local branch of your bank can help, although advice is often limited to their own products and services.

Finally, the most important thing to do once you have made a debt repayment plan , is to write it down, refer to it on a regular basis…..and STICK TO IT! Clearing debts can take a long time and a lot of perseverance and it will not happen overnight, but by remaining focused on your goals, you will end up debt free sooner than you may think. Good luck!

Most people living in the UK at the moment have, at some time or other, applied for credit in the form of a personal loan, homeowner loan or store or credit card and if you’re reading this article, then you are probably one of the millions of people who have some or all of theses types of credit, or at least have applied for them.

A large number of individuals do not bother checking their credit rating before they apply for a new loan and very often they will sit there and wait with their fingers crossed once they have completed the application, whether this is in their local bank or via an online application system, whilst a credit check is carried out to ascertain whether or not they will be granted the loan they want. Usually this process only takes a few seconds, but whilst you are waiting it can seem like hours (if you’ve been there, you know what I mean!)

If the applicant is accepted for the loan or other credit agreement they applied for, then all well and good and little more thought is ever given to the process, but in the situation where the application is rejected, or offered at a reduced loan amount or higher interest rate, then it can be of great concern and can cause problems for the person who applied for the loan.

Most individuals are unsure of just how their credit rating works and the process which lenders use to assess a person’s ability to repay a loan, their credit rating is their credit rating and nothing can be done about the situation to change the facts which stop them getting a loan. But with a little understanding of how lenders check loan applicants and a little care and management of their credit file, it is possible for an individual to improve their rating in order to be accepted for a loan or card in the future. 

There are several factors which a bank or building society will use to assess whether or not a person is acceptable for a loan, credit card or homeowner loan and although most of them will use the same information, many lenders will use it differently from others, with one lender placing more emphasis on one area than another, for example. The main areas for them to consider are, firstly basic information such as employment status, job security, homeowner status and income and affordability information. Other loans and credit agreements will also be taken into account, both on how much has been borrowed, what the monthly repayments are and also how the account has been handled, i.e. whether there have been any missed or late payments, or if the account is in arrears.

The lender will also then look at the applicant’s credit file. This can be through one of the three major credit rating companies; Experian, Equifax and Callcredit, each of whom keep an up to date record of a persons financial details, usually over a six year history, although in some cases this can go back further than this.

A person’s credit file contains details of their name, address history over a six year period, other people living at that address (although this information will not affect a person’s individual rating) and details of any existing loans, credit cards, homeowner loans or other credit agreements, along with a payment history of these credit items, showing if an account is up to date, in arrears or default, or has had any missed payments. If a person has had any County Court Judgements (CCJ’s), bankruptcies or Individual Voluntary Arrangements (IVA’s), these will also show up on the credit file.

Every time someone applies for any type of credit (including things such as mobile phones on a monthly contract basis) a credit score is carried out by the provider and this process leaves a “footprint” on that person’s credit file, which can affect their overall rating and therefore ability to be accepted for a new loan. if a new lender sees several credit checks for loan applications made by different companies over a short period of time, whether or not these have been accepted, rejected or not been taken up by the borrower, this can set alarm bells ringing for the new potential lender and have an adverse effect on the likelihood of that person being accepted for a loan.

As we have already said, different lenders use an individual’s information in different ways and also use different credit reference agencies, which can affect the outcome of the credit scoring process. So just because a person has been rejected for a loan with one company, does not necessarily mean that they will also be rejected by a different lender. Although the information held by credit reference agencies should be accurate and up to date, in many cases this is not the case and it is a worthwhile exercise to obtain a copy of your credit file from each of the main companies before applying for a new loan.

These can be obtained, for a fee of £2, by writing to each of the companies, or by applying online. If your information is inaccurate, or in some cases completely wrong, this can be updates and amended, although you may have to provide evidence to show that your record has been cleared and this can then take up to a month to show up on your credit file.

So if someone has been rejected by the lender for a new loan or a credit card, what can they do to improve their rating and stand a better chance of being accepted in the future? Firstly, as we have said, they should obtain a copy of their credit file and check the information is correct. If there are any genuine arrears, defaults or County Court Judgements outstanding, these should be cleared up as soon as possible and a certificate of satisfaction obtained from the company in question.

It is also vitally important to keep a good track record of repayments on existing credit, so ensure that all loans repayments and credit card bills are paid on time and kept up to date. Even if you’ve had a terrible payment record in the past, for whatever reason, three to six months of consistent and up to date repayments can make a huge difference to your overall credit score. Just as someone with too many loans or credit agreements can be rejected for a new loan, someone with no previous credit at all may also be rejected, simply due to the fact that they have no track record for a new lender to assess them on and although it may sound ridiculous, sometimes the best thing to do is apply for a small loan or credit card elsewhere, just in order to be able to show a record of repayments.

Finally, the most important thing for anyone to do, whether they are thinking about taking out a new loan or not, is to maintain their credit rating at as high a level as they possibly can. Keep up to date with all repayments and repay existing debts as quickly as possible, do not just make the minimum payment on your credit card each month, clear as much of it as possible. Also continue to check your credit file with all three credit reference agencies every few months to make sure the information held on you is up to date and accurate.

By following these simple guidelines and only applying for credit when you actually need it, you credit rating may improve significantly and continue to do so the longer a good track record is maintained.

When someone is looking for additional funding for whatever purpose, whether it is business related, for a new purchase such as a car or a holiday, or simply a debt consolidation loan to tidy up a person’s finances and make the monthly budgeting plan easier to manage with one single repayment, there are a wide range of options available on the market place, not only from a large number of different providers all trying to compete against each other to offer the best rates, but also a wide variety and choice of alternative funding options, from overdrafts, credit cards, hire purchase agreements, mortgages or homeowner loans, unsecured loans and secured loans.

Each alternative has its advantages as well as its disadvantages and it can be quite a minefield for someone who may be looking for a new loan to have to wade through all the various options. In the majority of cases it can be beneficial to seek professional advice from an independent financial adviser (IFA) or a loan broker, who will be able to help you get the right type of funding for what you require. In this article we are only going to look at one particular option for a loan, that is a secured loan.

As the name suggests, a secured loan is one which takes some form of security for the loan, which may be called on in the situation where the lender has to call in the loan if the borrower should default on his or her repayments. This would be done by repossessing the property in question, which would then be sold on by the lender in order to get their money back. Therefore, when we talk about a secured loan, the security is there for the benefit of the lending organisation, not the person who is applying for the loan. In the majority of cases, the security to be used is the borrower’s home, but it could actually be any asset owned by the applicant, such as an investment, a second house, a car, or even a work of art, for example

As we have already said, in the majority of cases, a secured loan uses the borrower’s main home as the security for the loan. Most individuals who apply for a secured loan already have an outstanding mortgage, or homeowner loan on their property. A secured loan takes advantage of the equity which is held in the property, that is the difference between the value of the house and the balance on the existing loan.

In most cases, the maximum loan to value ratio which is allowed across all loans is around 80 or 85 per cent, but there are some lenders who will allow more than this (very few in the current economic conditions), whilst other lenders may limit the maximum loan to value as low as 65 or 75 per cent. As the loan to value ratio increases, so does the level of risk for the lender and therefore usually the interest rate charged will be higher, along with the lending criteria being tougher.

The main mortgage or homeowner loan on the property takes what is known as a first legal charge on the property, with a subsequent secured loan taking a second charge. In the case of the borrower defaulting on the loans and the property being repossessed, the first charge loan would take priority when it comes to getting paid out, with the second charge loan depending on there being sufficient equity from the sale proceeds. As this poses a higher risk for the secured loan provider, the interest rates on secured loans are invariably higher than those of a typical mortgage.

It is possible to take a secured loan out on a third or even fourth charge basis, depending on the amount of available equity, but these are extremely rare. 

As with any other type of finance, there are advantages and disadvantages with a secured loan. On the positive side, secured loans are generally readily available through a number of routes. Most banks and building societies offer them, as do centrally based loan and finance companies. Loan brokers and intermediaries usually have access to either the whole of the loan market , or a selected range of providers and therefore this can be an advantage when sourcing the best loan.

As the loan takes security out against the borrower’s property, the risk on a secured loan is far less than that on an unsecured loan, making it a relatively cheap option. Likewise, due to the additional security of a secured loan, it is possible to borrow much larger sums of money than it is with alternative funding options and the loan is able to be taken out over a much longer period than the usual four or five years of an unsecured loan, often with terms of anything up to 25 years, thereby significantly reducing the amount of the monthly repayment.

A potential borrower who has a less than perfect credit history will stand a better chance of being accepted for a secured loan, once again due to the increased security for the lender, although they are still likely to have to pay a higher interest rate and be limited to a lower loan to value ratio than someone with a good track record.

On the down side, as the secured loan uses the applicant’s property as security for the loan, the borrower must be a homeowner. A tenant, or somebody living with their family for example will not be eligible for a secured loan and will need to seek alternative funding elsewhere. It is also possible for the borrower to have their property repossessed if they should fall behind with their repayments and default on a secured loan and as a result of this, all secured loan documentation contains the warning “your home is at risk if you do not keep up repayments on your mortgage or other loan secured on it.” Although taking a secured loan out over a long term of years has the advantage of reducing the monthly repayments, overall interest will be paid for a much longer period than with an unsecured loan and therefore the total cost will be much higher.

Following the recent credit crunch and the general economic slow down in the UK, there has been a significant reluctance on the part of lenders to offer loans of any kind to borrowers, however good their credit history may be. As secured loans depend on the value of the borrower’s home and with property prices falling in the UK over the past couple of years, many lenders have either withdrawn their loan products from the market place altogether, or severely restricted the maximum loan to value ratio they will allow in order to avoid borrowers entering a negative equity situation.

But as property prices are slowly starting to show some signs of growth over the past couple of months, hopefully this will feed through to the secured loan market and we will see some new, more competitive products appearing from lenders.

Finally, the advice for anybody who may be considering taking out a loan of any kind is to think carefully before you borrow. It can be expensive and take a long time to repay any money which has been borrowed, therefore only borrow the minimum amount you require and don’t be persuaded to go for the maximum amount which you may be eligible for.

Also, unless you are extremely confident and knowledgeable about the loan product you are looking for, it can save a lot of time and, in the long term also a lot of money, to take advice from a professional adviser such as an IFA or loan broker, who is able to offer advice on the best options for your particular needs as well as source the cheapest loan from the whole of the loan market.

Over the course of the past eighteen months or so, it seems as though there hasn’t been a day gone by where either a specific bank, or the banking sector as a whole has not been in the news headlines, for a variety of reasons, but all of them bad.

The banking sector is currently in turmoil, as years of greed and irresponsible lending policies have finally taken their toll on the sector, with banks making record losses, being taken over by competitors and receiving billions of pounds worth of government bail outs to help write off bad credit loans.

Due to a lack of liquidity, it has become extremely difficult for an individual to obtain funding through a personal loan or homeowner loan, unless they have a perfect credit rating and even if they are accepted for a loan, despite interest rates being at a record low level, the cost of personal finance seems to have increased dramatically, making a cheap loan seem like a thing of the past.

At the same time as this, interest rates for savers and investors have plummeted and many savers are concerned about just how safe and secure their savings actually are in the bank or building society. It seems hardly surprising therefore, that many people have lost faith in banks, both as savers and borrowers and are now looking for an alternative home for their money, or provider for their next personal loan.

But what are the alternatives to the traditional bank or building society route, for someone who has become disillusioned with the system, or is unable to obtain the loan they require?

Credit Unions

One alternative solution for both savers and those looking for a personal loan is a credit union. Credit unions have been around for many years and operate on the principle of a financial co-operative society, existing for the benefit of members and have been growing in popularity over recent years and particularly since the start of the latest banking crisis.

A credit union is owned solely by its members and run by the same people, all of whom must have something in common with each other, such as all working for the same company, living in the same local area, or being members of another group or organisation. The individual members of the credit union invest their own money in the central fund, along with all the other members, which can then be used to offer cheap loans to other members of the union and offer a better return on an individual’s savings than they would ordinarily receive from a typical bank or building society deposit account. This would be paid to the member in the form of a regular dividend, rather than monthly interest.

For someone looking for a small personal loan, a credit union offers a cheap and flexible alternative to their normal bank. One of the rules of a credit union is that the maximum level of interest which can be charged on a loan to a member is capped at 2 per cent per month, but in many cases the actual rate which is charged is much less than this. Repayments are extremely flexible and a borrower is able to take out a loan for just a few months if they so wish and repay all or part of the outstanding balance at any time without incurring penalties.

The important thing to remember about this type of organisation is that, in order to benefit from it, you have to be a member and the credit union is run solely for the benefit of its members, therefore any profits made are returned to those same members in the form of dividends and lower interest rates on loans, unlike banks which are more interested in generating huge profits for their shareholders, at the cost of the ordinary customers. 

With regards to saving through a credit union, this too is extremely flexible. It is possible to deposit a lump sum, or make regular savings amount either by direct debit or directly from salary (particularly in the case of credit unions which are run through employers). The money invested is accessible at any time and it is possible to deposit, or withdraw cash as often as you like. Under current legislation, there is no interest payable on savings within a credit union, but a dividend is paid on a yearly basis, based on the interest charged on the loans made by the union.

Clearly the amount of dividend can vary, depending on term and amount invested, but typically it is the region of between 2 and three per cent, but could realistically be as high as 8 per cent. As from May this year, however, credit unions will have the option of paying interest to their members rather than a dividend.

Whether an individual joins a credit union as a saver or a borrower, they are offered a high level of protection automatically through the organisation. For someone taking out a personal loan, the credit union automatically provides free life insurance to the borrower to cover the outstanding balance of the loan. For savers, it is reassuring to know that all credit unions are covered under the Financial Services Compensation Scheme, which means that a person’s money is protected even if the credit union were to close down.

Credit unions have been around for many years and up until recently have often been thought of as out of date. But due to the recent problems in the banking sector they are starting to grow in popularity once more and the government is now becoming involved, with plans to alter the legislation which regulates credit unions, in order to bring them more up to date and make them more appealing and accessible to a wider range of individuals.

One spokesman for the government said “The excellent service provided by Co-operatives and credit unions take place within an outdated legislative framework and overhauling this will be key to achieving a significant expansion of the sector. I want the sector to thrive and grow further, to be widely seen as a genuine alternative to proprietary companies across the country, not stereotyped as “old fashioned” or confined to its Northern roots. This is a vision of credit unions as the modern day equivalent of 18th century “town banks” providing a local, trusted alternative to the national banks on every high street. To achieve this vision means removing barriers to co-operatives competing fairly in the market place and enabling them to bring a greater range of services to a wider range of people.”

Hopefully, new legislation will bring renewed activity and interest in credit unions and not restrict them by imposing too many prescriptive rulings on their activities. Either way, interest continues to grow in these organisations, both for savings and personal loans and it looks as though they will be here to stay for some time, providing a realistic alternative to the traditional bank.

For more information on credit unions, or to find one in your local area, contact the Association of British Credit Unions Ltd.

It is a commonly known fact that the average adult person living in the UK today has a higher level of personal debt through personal loans and credit cards than at any other time previously and the overall level seems to be increasing at an alarming rate.

In many cases, these debts can be spread across a number of different creditors and could include things such as a homeowner loan, or mortgage, a couple of personal loans and maybe three or four different credit cards and store cards. Even when times are good and the economy is strong creating good security for employment prospects, it can be a daunting task managing all the different bills which land on the doorstep each month, ensuring that everything gets paid on time.

But with the onset of the credit crunch and recent slow down in the UK economy leading to recession, and worries over job losses, unemployment and reductions in overtime and bonus payments from employers, large monthly repayments on outstanding loan debts can be a real worry and many people are now changing their attitude towards their personal debt levels and making a serious attempt to reduce their personal loan and credit card balances significantly, or even pay them off completely.

Those individuals who are lucky enough to have sufficient spare cash each month, in many cases are now realising just how vulnerable their situation could be if their income were to stop suddenly and are making extra efforts to clear their outstanding personal loans and credit card debts as quickly as possible, in order to reduce their committed monthly outgoings.

Despite the fact that the base rate of interest on homeowner loans and mortgages has dropped significantly over the past few months, thereby reducing many borrower’s monthly outgoings, this is not the case when it comes to personal loans and credit card rates, which have continued to remain at their previously high levels and with many individuals seeing a drop in their regular income, these are usually the debts which cause the problem with the monthly budget.

When borrowers have several outstanding loans and card balances, it is quite common for them to apply for a debt consolidation loan, which combines all their outstanding debts into one loan with only one monthly payment. Although this can save a great deal of money in monthly payments, allowing a person to have more disposable income each month, in the long term this option can often end up costing the borrower more than their original debts would have done, as usually the payments are spread out over a much longer term, with interest being charged for a longer period and therefore costing more in total, even though the monthly payments are less.

This option is fine for someone who needs to reduce their outgoings each month, but for someone who wants to clear their debts as quickly as possible, it is only extending the repayment period.

So where should a person with a variety of personal loans and cards start when they seriously want to clear their debts?

Firstly, it is important to ensure that each of the creditors receives some level of payment each month, even if this is only the minimum amount, as this ensures a clear credit record for the borrower in the future. The person should then check each one of their credit agreements carefully, whether it is a loan or a credit card, to confirm what the rate of interest being charged is on each debt and whether this interest is added on a daily basis, annually, or all at the outset of the loan.

If a personal loan has had all the interest added at the outset, there is little point in paying this off early unless the loan company offers a discount for early repayment. In some cases a lender will actually charge an additional penalty for repaying a loan early and the borrower should be careful to check the small print to see if this is the case and how long it applies for. If in any doubt, contact the company who provided the loan in the first place.

Assuming that there is no disadvantage to repaying any one particular debt first, typically those commitments which charge the highest rate of interest should be the first ones to be cleared. Under normal circumstances these tend to be store cards, mail order catalogues and credit cards. The rate of interest charged will be shown on the monthly statement.

Where there is more than one interest rate charged, for example on a credit card which charges different rates for purchases, cash advances and balance transfers, the balance which is being charged at the lowest rate is cleared first. This is an important area to note for someone who may be considering a zero per cent balance transfer onto their credit card, if they already have an outstanding balance on the card, charged at a higher rate, none of this debt will be cleared until the interest free element has been fully repaid.

Apart from this trap, balance transfers can be an effective way of reducing interest payments on other debts and clearing them faster, as the full amount of the monthly repayment will be used to clear capital, not interest.

Once credit card balances have been cleared (apart from zero per cent interest elements), the next most expensive form of credit are normally unsecured loans. These may have lower repayment amounts and smaller balances than secured loans and mortgages, but the interest rate charged is usually considerably higher, as this type of loan presents a greater risk for the lender than a secured loan would.

As various outstanding debts are cleared, it is important to redirect the savings made towards the next most expensive loan or credit card, continuing down this route until all debts have been cleared. It may seem like a long way off at first, but it will happen eventually (honest!!) and those individuals who are most focused on channelling funds back into repaying their personal loans will , not surprisingly, be the first ones to become debt free.

If someone is in a situation whereby they can not afford to make all their loan repayments each month, firstly they should contact each of their lenders to arrange reduced repayment levels wherever possible. If this is still not sufficient to manage regular payments, then it makes sense to keep up with the repayments on any secured loans first, as these are the only ones which can cause a person’s home to be repossessed. Any arrears and defaults, should be allowed to build up on unsecured loans and credit cards first, although this should of course be avoided wherever possible.

Finally, if after reading this article, you are in any doubt as to what course of action to take to clear your loans and other debts, there are several services and organisations which are able to offer help and advice on a one to one basis, many of which are free of charge.

Independent financial advisers, debt counsellors, debt management companies can all give advice, but may charge for their service. For general advice on debts charity organisations such as the Citizens Advice Bureau (CAB) can provide an excellent service for no cost. If you are serious about clearing your debts, take some professional advice, develop a repayment plan which is manageable and realistic, write it down and place it somewhere where you will see it every day and then stick to it until you have achieved your goal of becoming debt free.

Most of the population of the UK have been in debt at some time or other in their lives, even if they currently don’t have any commitments outstanding. Whether it is in the form of a mortgage or homeowner loan to buy their house, a personal loan to buy things such as a new car, or a credit card for use in emergencies or day to day shopping expenses, the majority of us have experienced being in debt to some degree or other.

But recent surveys have shown that the total level of debt in the UK is growing dramatically, some reports claim that consumer debt on loans and cards is growing at a rate of £1 million every ten minutes and that the average adult in Britain currently has in excess of £30,000 of personal debt (including outstanding balances on homeowner loans and mortgages). So it would appear that we have become a nation of borrowers, with some individuals obviously taking out loans and other credit agreements at an alarming rate.

Whether or not someone is considered as having a large amount of debt is, to a certain degree, relative to their own personal circumstances. This would include taking into account things like the level of earnings that particular person may have, to fund the repayment amounts each month, or what level of assets the person may own which could be used as security against the outstanding loan amount.

For example, if someone was making monthly repayments on a personal loan of £500 perhaps, is this a high amount? Clearly, if the individual in question only has a take home pay of maybe £800 per month, then this is an extremely large amount of personal debt, however if the repayment amount is perhaps only ten per cent of the persons take home pay and they have assets such as a car and a large amount of equity in their home to cover the outstanding loan balance, then the situation doesn’t seem to be quite as serious and the borrower is unlikely to be concerned about the level of debt.

The problem which we are currently facing, due to the credit crunch and the global economic slow down, is that earning levels are not guaranteed and unemployment is on the increase, whilst at the same time assets such as houses in particular are losing value, thereby reducing the level of a homeowners equity.

So, to revisit the example used above in the current economic climate, the borrower with a good income may lose their job, causing problems with having sufficient income to meet the loan repayments, whilst at the same time the equity in their home has been reduced through falling house prices and nobody is prepared to buy the car, as the market is currently flat. This may seem like an extreme demonstration of what can go wrong, but in reality this is just the sort of thing which can and does happen all the time.

In other cases, individuals simply borrow money in order to buy the things which they can not afford. This may start with small purchases on a credit card and rather than paying the balance off in full each month, minimum payments are made, thereby leading to a balance building up quickly.

Before the borrower knows where they are, the card is up to its credit limit. At the same time the same person may have a personal loan to purchase a car and a few store cards for those weekend shopping trips, because you’re not really spending money if you’re putting things on your card…are you???

All of a sudden, this individual finds him or herself with a huge problem. All those small purchases they made on their cards, the odd CD here, a pair of shoes there, have all built up to a level where all their cards are “maxed out” and they have an insurmountable level of debt which they have absolutely no way of being able to repay, in many cases they will struggle to even keep up with the minimum repayment amount each month.

So what is the answer for someone who finds themselves, for whatever reason, in a large amount of debt which they are unable to manage? The first option may be to look for a debt consolidation loan to bring other debts together in one repayment amount with a lower interest rate. This can save a large amount of money in monthly repayment amounts and also ensures that the debt is repaid over a fixed term, rather than making minimum payments which only realistically cover the monthly interest amounts.

Another option for someone with credit card balances is to apply for a zero per cent balance transfer card, which can save interest over a fixed term, but repayments must still be kept up to date. Anyone taking this route must remember that their debts have not gone away, they have simply been moved elsewhere and it is vitally important that additional debt is not run up once again. Cut up any existing credit and store cards and only spend what you can actually afford each month, to avoid falling into the trap again.

For someone who may have fallen behind with their personal loan and credit card repayments and may have outstanding arrears, a debt consolidation loan, or a zero percent credit card may not be an option as these will often not accept anybody with a history of bad credit.

In this case it may be necessary to enter into a debt management scheme. For a monthly fee, a debt management company will deal with all a person’s creditors, negotiating minimal monthly repayment amounts at reduced interest levels and in some cases, getting final settlement figures reduced by lenders.

In exchange for this service, the borrower makes one monthly repayment to the management company, who in turn pay the various creditors. For someone opting for this route, it is unlikely that they will be able to get any further credit on cards or loans until the original scheme has finished and the debt has been repaid. If things are extremely serious and there is no other way out, the final option for someone with debts is bankruptcy, but this is an extreme measure and should be avoided wherever possible.

For someone who may have debts which they are finding quite manageable at the moment, but may be concerned about unforeseen eventualities in the future, such as unemployment, or long term sickness, there are a number of insurance products which can cover loan and other debt repayments and balances.

These include, payment protection insurance (PPI), critical illness cover, permanent health insurance and of course, life cover. These policies all cover different things and one individual policy is probably not adequate to cover every possibility. For anyone who has outstanding personal loans or other debts which are unprotected, the best course of action is to have a meeting with an independent financial adviser (IFA) who can advise you on the various products available and which ones are best suited to meet your specific needs and requirements.

Of course, the best piece of advice with regard to getting into debt is quite simple…don’t do it! Think before you spend money on a credit or store card and ensure that you pay off the full amount of the outstanding balance each month, so that balances do not build up.

Before applying for a personal loan ask yourself if you really need the item in question, do you need to borrow as much as you are intending to, would it be more appropriate to save money over a few months to get the amount you need, can you afford the monthly repayments, not only now, but next year and the year after that and is the loan adequately protected in the event of something unforeseen happening to you?

Remember, every penny you borrow has to be repaid at some time, plus interest and borrowing for short term pleasures and luxuries can mean many years in tough repayments!

Practically everybody living in the UK today has, or has had at some time or other, some type of credit agreement, whether this is in the form of a personal loan, overdraft, credit card or mortgage.

The majority of borrowers are likely to be able to tell you broadly how each method of borrowing differs from the others and also what the similarities might be, as well as probably have a reasonable idea as to what the relative costs of each method may be.

Despite this vast wealth of apparent knowledge, many people still find it difficult when it comes to choosing the best method of borrowing to suit their particular needs and requirements and also when it could be advantageous to take out one form of credit over an alternative method of borrowing.

In this article, we aim to look at the various alternatives which are available for someone needing additional money, along with the advantages and disadvantages of each option.

One of the most important factors to take into account is how long a term the borrowing is going to be over.

Overdrafts

For short term borrowing, for example, funds to see you through until the next pay day for a week or two, then an overdraft is probably the best option. Although the interest rate charged on overdrafts tends to be one of the highest rates around, the borrowing is usually only for a short period and therefore the cost is minimal. Also, if you have an authorised overdraft facility on your current account, this can be used whenever required, without having to apply for the credit and you do not have to give a reason for the borrowing to your bank.

Some types of current account will allow a free or reduced rate overdraft on small amounts, but with any account, if you exceed the agreed facility level and use an unauthorised overdraft, then there are likely to be penalties and a higher interest rate charged. If your account is constantly overdrawn, then it may be more cost effective to consider an unsecured loan instead, as this will certainly be a cheaper option.  

Credit Cards

Credit cards have become extremely popular over the course of the last few years and most people have such a card, even if they tend not to use it. Credit cards can be extremely useful for things like emergency bills, or repairs, which were unexpected and therefore not budgeted for. They are also very useful for making large or expensive purchases, such as expensive household items or holidays, as most credit cards offer insurance as a built in part of the facility.

However, as with overdrafts, credit cards are usually a rather expensive way of borrowing money and as such should be treated as a short term borrowing solution. With most cards, if you clear the full balance every month as the bill arrives, there will be no interest charged, but if you allow a balance to build up, the interest can be extremely expensive and the minimum monthly repayment will probably only just cover the interest charge.

Many credit cards now offer 0 per cent balance transfers from other card providers for a limited period, usually up to 12 months, which can save a large amount of money in interest payments, but there is often a fee for doing this. Credit cards must be used with care, too many people have got themselves into an awful lot of trouble by running up large balances on cards, which they then have no way of repaying, so be careful.

Loans

When it comes to borrowing money, the first thought most people have is to take out a personal loan of some kind, and usually this is the most appropriate route to take for things such as purchasing a new car, or making home improvements, for example.

The problem is that there is such a wide choice of personal loans available in the market place, not only between different providers, but also in the amount to be borrowed and whether to choose a secured loan or an unsecured loan.

Generally, unsecured loans are used to borrow smaller amounts of money, usually up to a maximum of £25,000 and these run over a shorter term than secured loans, usually up to a maximum of 7 years.

In many cases the rate of interest charged on an unsecured loan becomes cheaper as the loan size, or term increases. Therefore, a loan of £3,000 is likely to charge a high rate of interest, whereas a loan of between £5,000 and £10,000 is likely to be cheaper and a loan in excess of £10,000 will be cheaper still.

However, don’t be tempted to borrow more than you actually need, just because the rate is cheaper, as the money plus interest all has to be paid back eventually! When choosing what term to take the loan over, it makes sense to keep it in line with the item being purchased.

For example, if you change your car every four years, then a four year term would be appropriate on the loan. A personal loan to pay for a holiday however would make more sense over a 1 year term, as you will probably want another holiday next year as well and you don’t want these debts to mount up.

Secured loans work on the same principal as unsecured loans, apart from the fact that the lender takes some kind of security against the loan, usually the borrower’s house. This means that if the borrower defaults on the loan, the lender has the right to reclaim the outstanding debt, plus costs, from the secured property in question. This means that it is possible to lose your home if you opt for a secured loan.

Secured loans are usually used for major expenses, such as major home improvements, or extensions, or even in some cases debt consolidation and often run for a much longer term than an unsecured loan, often up to 25 years or possibly longer. As a result of this higher lending amount and additional security for the lender on the loan, a secured loan usually charges a lower rate than that of an unsecured loan, but will cost significantly more over the term due to a larger loan amount and much longer repayment period.

A mortgage, or homeowner loan, is the cheapest rate and longest term loan available and for most people it is the only way that they are able to purchase their own home.

The typical term is for 25 years, but this may be shorter or longer than this, often depending upon the age of the applicant. A mortgage o homeowner loan is exactly the same as a secured loan, except that it takes a first legal charge on the property in question rather than a second charge, as in the case of a secured loan.

This makes the loan a better risk for the lender, as they will have first call on any money from the sale of the property in the case of a default on the loan. There are many different types of mortgage product available and it is worthy seeking professional financial advice before choosing a suitable product, to ensure the loan taken is the most suitable to meet your needs and requirements.

To conclude, there are many different options available when it comes to borrowing money and you should think extremely carefully, checking out all the various alternatives before committing to any one particular route.

If you are in any doubt about what you require, it is worth taking the time to seek professional advice from and independent financial adviser. Even if the adviser charges you a fee for his services, it could save you a lot of money in the long term.

Don’t make any snap decisions when it comes to borrowing money, think about how much you actually need to borrow and also about your ability to be able to repay the debt in the future. Once you have decided on a particular route, be careful to read all the small print before signing the paperwork, ensuring that you fully understand exactly what you are getting into.

And finally, borrowing money in any way is an expensive thing to do, so if you don’t absolutely need to do it, then don’t borrow!