Debt
Basic guide to debt
Debt is a fact of life for many people. Many of us have to borrow a bit of extra cash at some point in our lives, whether it's to help buy a home or cover the cost of unexpected medical bills.
However, losing control of debts can quickly lead to serious financial difficulties. And even if you're on top of your debts now, how would you cope if you faced a high cost - such as car/home repairs - out of the blue?
Let's look at how you could maintain/improve control of your debts, and what you could do if you're having problems with them.
Assessing your situation
What kind of debts do you have? This is an important question - although all debts are important to repay, some can come with much more serious consequences than others if you don't repay them as agreed.
Secured vs. unsecured debts
Secured debts include things such as your rent/mortgage, Council Tax, utilities or any type of loan secured against your home. These are your 'priority' debts. If you are unable to repay these, the consequences can be serious: in the worst instance, your home could be repossessed.
Unsecured debts include credit/store cards, overdrafts and personal loans. Although non-repayment of these debts won't result in you losing your home, you could end up accruing fees and charges, damaging your credit rating and being issued with a County Court Judgment (CCJ).
Work out what you owe
Sitting down and working out exactly what situation you're in with your debts should give you a much clearer picture of where you stand with your finances.
Write down all your debts, add them all up and work out exactly how much you need to pay to your different lenders each month. This will help you take the next step…
Budgeting
Drawing up a carefully thought-out monthly budget should really help you stay on top of your finances, and work out how much you can realistically put towards your debts each month. There are three basic budgeting steps:
Work out everything you earn or receive. This includes your monthly salary, any benefits or grants you receive (e.g. Child Benefit), and any other income you regularly receive. Try to make it as accurate as possible - make realistic estimates where necessary.
Total up your monthly outgoings. Include everything you need to spend in an average month: firstly, work out your priority debts (rent/mortgage, secured loans) and then your basic living costs: food, bills, transport, clothes, etc. Don't include the cost of repaying your unsecured debts.
Subtract your total monthly expenditure from your total monthly income, and you'll be left with your 'disposable income'. You should use this money for your unsecured debt repayments, along with any cash you want to put into savings or use as 'spending' money.
Now you should have a clear idea of how much money you actually have to go towards your unsecured debts. Some people find that, as long as they stick to their budget, they can comfortably cover all their costs.
Others will find they can't afford their agreed unsecured debt repayments. If you're in this situation, however, there are some debt solutions which could help you - for example, a debt management plan.
Debt management
If you can no longer afford your monthly repayments as originally agreed with your unsecured lenders, there are some professional approaches to debt that could help you regain control of your unsecured debts and pay them off at an affordable rate.
A debt management plan is one common approach to dealing with problem debts.
Debt management plan
A debt management plan is an approach designed to lower your monthly repayments to an affordable level, if you can't afford your repayments as originally agreed. Basically, you could ask your unsecured lenders if they'd accept lower monthly payments you're confident you can afford after you've covered all your essential monthly costs.
If you agree a debt management plan with a professional debt management company - and your lenders agree to it - you'll start making single monthly payments to the organisation you're working with, and the agreed amounts will be passed on to your unsecured lenders.
Bear in mind that making smaller repayments over a longer period could end up costing you more in the long run, as the interest will have longer to accrue on your debts. Your credit rating will also be damaged for six years, but as a debt management plan would only be suitable if you're really unable to afford your repayments, it's likely that your credit rating would be damaged anyway.
If you have a more significant amount of unsecured debt you can no longer afford, and you can't repay it in a reasonable time, you may need to consider a debt solution such as an IVA (Individual Voluntary Arrangement) or bankruptcy. You can speak to a debt professional for more information about how these approaches work.
If you want any more information about any of these solutions, talk to a debt expert.
This page has been provided by debt management company Gregory Pennington.