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Borrowing money is a fact of life, essential to reach and achieve goals. There is good and bad debt, both important, but it is essential to realise when debt is turning bad and when it is time to seek help for payday debt.
In this article about payday debt and when to start worrying, we shall take a look at:
Good and bad debt
You may need to take some debt in life to get unaffordable, big things like a home or a car. When debts are affordable, and the borrower can repay back the same day loan in manageable instalments, then the debt is considered good debt. If a person starts to take on too much debt and cannot afford to repay what they have borrowed, then the debt becomes bad. There are a few different kinds of debt to consider before you can begin to assess whether your debts are good or bad and if you need to seek professional help.
The term “secured debt” is when the loan is secured against collateral, for example:
- A mortgage – if you don’t repay, the lender can force you to sell your house
- Car Finance Loans – risk losing your car
- Logbook loans – Borrowers transfer ownership of their vehicle to the logbook lender
Secured debts should be repaid first. They are usually for big items that you would not want to be without if you do not repay your debt.
Unsecured Loans and Payday Debt
“Unsecured debt” have higher interest rates because there is a higher risk for the lender that he won’t get the money back. Types of unsecured debt include:
- payday loans
- peer to peer lending
- credit cards
- store cards
- bank loans
The vast majority of people who use credit cards pay off their balance at the end of the month. For those who fail to work their card in this way the interest rates on the borrowed money can be as high as 20% yearly.
Since the regulation of the payday loan industry and interest rates capped, payday loans are less of a problem than they once were. Payday debt has decreased. However, unsecured debts can soon get out of hand when a person has a lot of other repayments to make or suffers a loss of income.
Student debt is not considered a bad debt as it only has to repaid when a person earns over £21,000, a figure that will soon become £25,000. Many student loans are never repaid and are written off after 30 years. Some experts believe that we should rather refer to the term, student debts, as “graduate tax”.
So what have we learned so far about payday debt?
- Good debt is when a person borrows money for things that they can afford to pay back
- When the debts cannot be repaid the debt is considered bad
- Secured debts; when a collateral secures some debts
- If a person does not repay the loan, then the lender can repossess the collateral
- Unsecured debt is the most common kind of debt and is riskier and more costly
- Student debt is not bad debt and a person repays it when they earn enough money
Which debts should get priority?
It is important to repay secured debts first or risk losing your collateral. There is not much that banks can do when unsecured debt is not repaid except ruin your credit score. This makes it difficult to borrow money in the future. Not paying council tax can result in imprisonment, bailiffs at your home removing goods and money deducted from your earnings. Unpaid utility bills can result in the suppliers cutting off your house power. However, the water will always be left on. These are the kind of payments that should get priority.
If a person only makes the minimum payment on their credit cards, needs to cut back on food or finds themselves without some money left over each month, then they may be heading into bad debt. You can measure bad debt by comparing the amount of debt to your earnings.
Debt charities measure bad debt by someone who misses 2 bills over a six month period or who are struggling every month to repay debts. This measurement shows that 8.2 million people have bad debts in the UK.
Seeking professional help with your debts
Debt charities provide financial advice free of charge by debt charities who mediate with lenders and help people get back in control of their debts.
What are your options if you can not repay the bad debt?
Bankruptcy is an option for some people who become over-indebted but it will damage your credit score for six years and will result in your assets being sold off to repay your debts. An Individual Voluntary Arrangement freezes the interest on unsecured debts, like direct lender loans, and allows a person to repay their debts over a fixed period. Many people choose this over bankruptcy as they may get to keep their home. People with under £20,000 worth of bad debts can get a Debt Relief Order. This means their debts are frozen for a year and then written off.
So what can we conclude about payday debt?
People who take on too much debt that they cannot afford to repay must seek financial advice from a free source and deal with their problems. You can write off debt in a number of ways or the interest frozen and repayment plans put into place. Consumer credit in the UK is at dangerously high levels and 15% of the population are in bad debt.