Lockdown has thrown many challenges our way. Whether it’s a change in income, reduced working hours or being furloughed, millions have had to adapt to new circumstances.
Unfortunately, this has caused many to worry about their finances – particularly those repaying credit.
The good news is, there are a number of ways you can make your life easier when it comes to managing debt. Here, Paul Went, Consumer Managing Director at Shawbrook Bank, offers five tips to help out - from simple short-term ideas, to longer-term considerations.
Start by assessing the money you have coming in each month and what you have to pay out as essential costs.
Write down everything you spend money on in that month, including regular subscriptions, bills and mortgage payments, as well as the small things like your daily coffee, toiletries and takeaways which can often add up.
If this shows you that you’re spending more than you earn, go over your typical purchases again and see where you could cut back. Even if it’s just for a few months. It is important to remember here that cutting back on even small purchases is a step in the right direction to paying back any loans or debt you owe.
It is always important to remember that you are not alone in this situation. By talking to friends and family, or a professional for example a financial advisor, you can put your problems into perspective and make a plan on how to tackle them.
If you find yourself in a place where your debt has become unmanageable, talk to your lender about your situation. There might be a solution they can offer to help.
There are also many charities that can offer advice on what to do and even what benefits or other support might be available to you, including organisations like Step Change and National Debt Line.
If you’re struggling to make repayments at the moment, it’s important to let your lender know your situation. Rather than ignoring the problem, it’s better to contact them and work out which solution works best for you and your situation.
Many borrowers have been financially impacted by the Coronavirus pandemic and may have struggled to meet their repayments. Banks and lenders throughout this period offered borrowers a payment deferral on things like mortgages and personal loans.
Payment deferrals can offer a short-term break from monthly repayments but it’s important to remember that interest is still charged during this period. This means the total amount of debt which you need to repay will increase and is usually added on to the total amount payable.
Banks and lenders also have a range of tools to help customers in financial difficulty and will assess each customers situation individually and agree a plan that is more manageable.
It is not uncommon to have a number of debts from different providers, and if you find yourself in this position, you might consider taking out a debt consolidation loan to pay off your existing debts. Debts that can be consolidated include credit cards, bank overdrafts, personal loans, utility bills and phone bills, but things like mortgages, home loans or home equity won’t be included.
This would enable you to combine all or some of your existing debts into one manageable monthly repayment as opposed to several, making it much easier to keep track of all your payments. Debt consolidation could save you money depending on the method you choose. For example, with a debt consolidation loan, you could save money every month in interest and with one regular payment, fixed for the life of the loan, it could make budgeting easier too.
However, consolidating your debts onto a new loan may not always be the best option for you. You will need to consider the rate and the term (length) of the new loan, and you could end up paying more in the long run. A good way to work out if consolidating will save you money is to calculate the total cost of your existing borrowing vs. the total cost of consolidating your debts. Make sure you read your terms and conditions carefully before making a financial commitment.
Another option is creating a Debt Management Plan - a program that helps you assemble your non-priority debts into one affordable payment.
Essentially, you’ll work with a debt advice organisation to work out a debt management plan that works for you based on what non-priority debts you owe.
Usually, you’ll make your payment to them directly – and they will take responsibility for paying your creditors. This usually means your debts are paid through lower monthly payments than you are currently expected to make so it is important to note that this can take longer and therefore the total cost will be higher.
However, there are some unsecured debts like utility bills that can’t be covered under a debt management plan, and certain creditors are within their rights to request immediate repayment should they choose to do so. Be mindful that entering into a Debt Management Plan can affect your credit rating.