Ask the Expert: What should I consider when I first realise that my debt may have become unmanageable?
Our weekly Ask the Expert series continues, with Loan.co.uk CEO Paul McGerrigan turning his attention to another question about personal finance.
The aim of the series is to educate consumers, allowing them to make informed choices on managing their finances, with a different question being answered each week.
Q: What should I consider when I first realise that my debt may have become unmanageable?
A: It can be quite frightening when you first realise that you are in debt to a level that you may not be able to manage. For some people it can be an increase in mortgage payments, for others it can be having to repay student debts and for others shopping habits have slipped out of control and driven them into the red. Regardless of the cause, there are several things that you can look into in order to get on top of the problem. Firstly the DON’T’s. Don’t panic, Don’t bury your head in the sand and Don’t be ashamed. This happens to millions of people so you are far from being alone in your position. Here are some practical steps you can take to get yourself back on track. The best way out will be dependent on your specific circumstances but there will be a way back.
Understand your budget
First, take a look at your monthly budget. How does the money coming in compare to the money going out? Be realistic with yourself in terms of what you spend and check your bank statements. Write down everything you spend on and see if there is anything you can cut out - a weekly takeaway, eating out, and extra piece of clothing every week, after work drinks on a Friday or a daily mocha fix can all be cut back to save money. Of course you still want to have a lifestyle, but it may be important for a period of time to make sacrifices. One thing is certain your spending behavior will have to change to some degree.
Get some advice
Once you have done this exercise you should consider getting in touch with a debt advisor to discuss your position. There are many free facilities such as the Debt Advice Foundation and National Debtline, which are accredited by the Money Advice Service and can help discuss the options available. The people who work for these organisations are trained to help you manage debt. One of the things they will discuss is how to prioritise your debts.
Prioritise your debts
There are some bills that should be considered a priority, because not paying them could see you lose your home, ending up bankrupt or without access to the basic utilities required to live. These include mortgage or rent, council tax, child maintenance, and utility bills. If you are having trouble paying these, it’s worth taking the time to call these creditors and explain the situation. A good Debt Adviser will help you prepare for these calls. You will find that the companies may be able to provide a little leeway. Many gas and electricity providers, for example, have whole teams dedicated to helping people who cannot afford to pay bills.
After you have tackled the priority bills, it’s time to take a look at what can be referred to as the non-priority debts. These are still important, but nonpayment should not leave you homeless or bankrupt. Credit card debts, overdrafts and bank loans fall under this category.
Target the most expensive of these non-priority debts first – that is, the one with the highest interest rate – and consider carefully how much you can pay a month.
Once you have covered the most expensive debt, go on to paying the second most expensive, and so on. Remember before you miss a payment on any debt there is every chance it will impact your credit rating and your chance of getting debt in the future, so this should only be considered as a last resort.
If the issue is that you have many non-priority debts and they are putting pressure on your ability to pay all of your bills, it could be worth considering a debt consolidation loan, which consolidates existing debt and replaces it with a single monthly payment. This kind of financial restructuring should not be taken lightly and all the implications should be considered but it can address the short term issues without being detrimental to your longer term position. A consolidation loan can help you avoid having to miss payments by reducing your monthly payments to a more manageable level, which can in turn protect your credit rating. It is important to take good financial advice to ensure that you secure the best solution to match your specific needs.
Hopefully, these steps will help give you a plan of action to face your debt and restructure your finances in a responsible way with the least amount of stress.