Should you Ever Pay off Old Loans With New Ones?

Taking on new debts to pay off your old ones sounds like a problematic debt spiral, and in some circumstances it can be exactly that. In other situations, though, the idea can start to look quite attractive and like it could potentially help make your situation more manageable. Is it ever a good idea to pay off old debts with new?

The Advantages

In principle, there will be an advantage to paying off an old debt with a new one if you can get a better deal on your new loan than you are getting from your current lender. Paying off one loan with a newer one that has a lower rate of interest is, in many ways, the same as switching provider for a utility or insurance product. You simply move from one company to another, because with the new one you will pay less monthly and/or over the full term of the loan. Depending on your circumstances or needs, a better deal could mean a lower interest rate, saving money both monthly and in total, or it could mean a longer term which means you pay back more overall but have significantly lower and more manageable repayments.

This kind of situation might arise because you have held a loan for some time and better deals have come on the market. Alternatively, it may be that you didn’t get the best deal when you took out the loan, for example choosing an ultra-high-interest payday loan that you are now struggling with when you could have borrowed the same amount elsewhere at a much better rate. If you are genuinely struggling on your current deal and the new deal would be enough of an improvement to solve your problems, it is best to switch as soon as possible or your credit rating may fall and you may no longer have access to the better deal. If you are struggling with multiple debts, on the other hand, then a specialist debt consolidation service may be a better way to move what you owe and make things more manageable.

The Problems

In principle, any situation where you could get a better deal on the new loan is one where it is worth taking out a new debt to pay off an old one. In practice, however, things are not usually that simple. With the exception of credit cards, where balances can commonly and easily be transferred for fairly low fees, switching loan providers is not as simple as changing utility or insurance providers. For one thing, you may or may not be eligible to take out the second loan. There are online tools that can help you work out whether you are.

There is another major factor that affects whether you will gain from the switch. In order to switch, you will need to take out a new loan for the full settlement value of the old one, and then pay the latter off at once with the funds you have borrowed. This is where potential problems come in, as your old loan may well carry early repayment fees. It is important you look into these fees before making any switch. There may be multiple separate charges, so make sure you are aware of them all. It is only worth switching if you stand to gain more from changing deals than you will lose in early repayment charges.

Alternatives to Taking Out a Payday Loan

If you urgently need a financial boost to tide you over, payday loans can start to look tempting. However, with their extremely high interest rates they can quickly become a problem debt. Many people who take out payday loans as a short term measure find they have trouble paying them off. When this happens, interest rates of over 1000% APR (or equivalent in fees) can have plenty of time to bite.

If you are in a difficult situation but want to avoid payday loan debt, there are a number of lower-cost alternatives you might wish to consider.

A Word of Caution

You should think carefully about any sort of credit, and consider all your options before taking on debt. Make sure you know how you are going to pay back, and are confident you will be able to do so. However, as long as you properly consider your situation, these alternatives can prove far more manageable than payday loans.

Bank Overdrafts

If you speak to your bank, they may be able to arrange an overdraft on your account to help tide you over. Banks vary quite widely in how they manage overdrafts, but interest rates should certainly be much lower than on a payday loan. Some bank accounts come with attractive overdraft rates or even a small interest-free “buffer” as perks to attract customers.

Credit Cards

If you have a credit card, you may be able to obtain a temporary increase on your card’s limit if you talk to your credit provider. However, this is definitely an option for those who already know how they will be able to promptly pay back the debt. While credit cards are more affordable than payday loans, they can still be expensive and problematic if debt is allowed to linger. Nonetheless, if you know that you will be able to repay the full amount on time, this is usually decidedly preferable to payday lending.

Credit Unions

Credit Unions have been in the news for a while, with prominent figures who are critical of payday loans touting them as an alternative. These are community-based non-profits, giving members access to loans as well as to current and savings accounts. Loans from a credit union tend to be both more accessible than a bank and more affordable than a payday loan.

Budgeting Loans

This type of lending can be a huge help to those who find themselves in a very tight spot indeed. If you have been claiming working age benefits for 26 weeks or more and are lacking money for essentials, then you might be eligible for a budgeting loan. This is designed to cover the cost of things like rent, food, clothes and furniture. It is interest free, paid directly to your bank account, and will usually have a repayment period of two years.

Government Aids Debtors by Raising Forced Bankruptcy Threshold

Those who are in debt and are having trouble coping financially received some relief from the government this month. It has been announced that the level of debt required before a debtor could potentially be forced into bankruptcy is going to be raised significantly. Where previously this threshold was £750, it is now set to be raised all the way to £5,000.

The current £750 limit has been in place since 1986, and over the course of that time its value in real terms has been eroded significantly by nearly 30 years of inflation. According to the Bank of England’s inflation calculator, when it was first introduced it was equivalent to nearly £2,000 in 2013 (the latest year covered by the calculator), which means time has cut the true value of this limit to well under half of what it represented originally.

The president of insolvency trade body R3, Giles Hampton, said that “The rise in the creditor bankruptcy petition threshold is welcome, although £5,000 is far higher than expected.”

Hampton went on to call the previous limit “an entirely inappropriate level” and added that “the protection it offered debtors had been steadily eroded by inflation over the decades.”

According to business minister Jo Swinson, it will be replaced by the new, much higher limit in October of this year. The new £5,000 figure is not only a big increase on the previous figure, but also significantly higher in real terms than the current limit was even at the time of its introduction.

The increase of this threshold will be accompanied by another measure designed to help those in debt, as the maximum amount of debt that a debt relief order can cover will also be increased. Debt relief orders are often considered a more affordable alternative to going bankrupt, and were first introduced in 2009. Since that time, there have been well over 140,000 debt relief orders throughout the UK. They can currently cover debts of up to £15,000. From October, they can include up to £20,000 worth of debt.

Christians Against Poverty chief executive Matt Barlow welcomed this move, saying that over a third of the charity’s customers currently cannot afford bankruptcy fees but have too much debt to utilise debt relief orders. The raised threshold will open them up to more people who are currently struggling.

Barlow pointed out that “We had campaigned for the limit to rise to £30,000, which would have seen more than half of our clients being able to afford this debt solution.” Nonetheless, he recognised that “£20,000 is a good start.”

Debt Consolidation: The Pros and Cons

Debt consolidation is frequently a good way to make multiple, difficult debts more manageable. If you are struggling to repay your debts or simply to keep track of multiple sources of borrowing, debt consolidation can be a way to put it all together into a single, manageable payment that you have room for in your monthly budget.

There are many advantages to debt consolidation, but there are also a few disadvantages. In order to understand whether you will benefit from taking out a consolidation loan, it is important to understand these factors fully.

The Pros of Debt Consolidation

The main factor that works in favour of debt consolidation loans is simply the fact that, for those who currently hold multiple debts, everything will now be in one place. You will not have to keep track of multiple credit products with differing interest rates and, if you have been having trouble repaying, you won’t need to worry about prioritisation. You will make a single payment to a single lender, and you will hold only one debt with a single interest rate.

If you have been having trouble handling multiple debts, a consolidation loan can also be a chance to effectively renegotiate things. You may be able to obtain a consolidation loan that not only combines all your debts but works out a new payment plan that will be more manageable in your current circumstances.

If you take out a consolidation loan, it is likely that your credit rating will also improve. Other loan accounts and credit cards will be closed down and replaced with just one. To lenders looking at your credit report, this is a sign that you are managing your debts more responsibly and so you look like a better, lower-risk borrower.

The Cons of Consolidation Loans

There are really few drawbacks to consolidation loans, provided you are in a situation that makes it an appropriate move in the first place. However, they are not completely without their potential disadvantages.

The main disadvantage is that they can result in paying higher interest on some of your loans. For example, credit card debt that is moved to a consolidation loan will be subject to the interest rate of that loan, while it might otherwise have been possible to transfer that debt to a new card that offers 0% on balance transfers.

Some consolidation loans also include penalties for paying back early. If you believe that you might be able to pay back your loan ahead of time, check whether there are any such penalties before taking a package out.

Can a Debt be Written Off?

In exceptional circumstances, it might be possible for a debt to be partially or fully written off. It is even possible that a creditor might cease all action against you. While this situation is rare, it can seem like a genuine godsend to those who find they are eligible.

Dealing With Debt

It is important to note that having a debt written off is rarely if ever a first option to consider if you are having trouble with debts. As it will only rarely be granted, you should first take every reasonable effort to manage your debts and your financial situation. Contact your creditors and see if they are willing to come to a more manageable repayment arrangement. Seek independent advice and come up with a debt management plan.

Lump Sums

Possibly, the easiest way and most common to get part of a debt that you are struggling to repay written off is to offer a lump sum. Unfortunately, most people who are struggling with debt will be unable to do this. However, for those that are, offering creditors a full and final settlement can be an attractive option.

If you are able to offer a lump sum which represents a reasonable portion of your debt, your creditors may be willing to accept it and write off the rest. It is, in many ways, better for them to accept less money but to get it immediately instead of slowly over a number of years, especially if your circumstances may lead to complications when it comes to repaying the full amount. If your creditors agree, make sure you obtain written evidence that the lump sum is all you will be required to repay.

Simple Write-offs

In very rare circumstances, a company may be willing to write off your debt completely. This will usually only happen if you have very little hope of repaying the debt. Not only will you have to be on a low income for a creditor to agree to this, but you will also have to be in a situation which means your finances are unlikely to improve. Most often, debts are written off for the elderly or people suffering from serious illnesses.

Individual Voluntary Arrangements

Many companies advertise a “government scheme” to help write off part of your debts. This usually refers to Individual Voluntary Arrangements (IVAs). While IVAs are genuine, they are not as simple or pleasant as the adverts would suggest. For several years, every bit of spare income you have will likely be paid towards your debts. You may also be required to sell valuable possessions. However, if you are in a very difficult debt situation this can still have some definite advantages. After the amount you agree when the IVA is taken out has been paid, the remainder of your debt will be written off and you will be debt-free potentially much sooner than you would have been otherwise.

Stemming the Rise of Debt

Being in debt is not shameful. Most people experience being in debt at least once in their lives. However, while debt may not be shameful it can become deeply unpleasant. Sometimes the need to meet repayments will lead to building up more debt elsewhere in order to afford the cost of getting by.

If you are in a difficult financial situation and your debts keep going up, there are several things you can do to try and stem the increase.

Don’t Use Credit Cards for Cash Withdrawals

You need money to get by, and if you don’t have enough in the bank it can be tempting to use credit cards to withdraw cash. In fact, this can even look like a necessity. However, using credit cards for cash withdrawals should be avoided. Instead, you should just make the purchases directly with the card whenever possible. This will usually result in a better rate of interest than cash withdrawals.

Talk to Your Bank

Exceeding your overdraft limit, will usually lead to being hit with higher interest rates and additional charges. If you find yourself regularly needing to go over your limit, then try talking to your bank. Many major banks may be willing to increase your overdraft limit, which can avert these added costs and reduce the added burden it places on your debts.

Rearrange Your Debts

Borrowing from one place to pay off another is certainly not always a good idea, but there are times when it makes sense. For example, if you have built up debt on a credit card with a poor interest rate, it may be worth trying to obtain one that offers a better rate. This could help you clear the higher-interest debt on your existing card, as well as making future purchases at the improved rate. However, if you are struggling to meet debt repayments and are tempted to borrow from a higher-interest source, be extremely wary. This will almost always just make things worse further down the line.

Keep Stock of What you Owe

Some people try to wilfully ignore the exact amount they owe, because it is an unpleasant fact they do not want to confront. However, ultimately it is best to know how much you owe, to whom you owe it, and what the interest rates are. This will help you to get a better grasp on your situation, and focus your efforts on paying back higher-interest debts first.

PPI and People in Debt

The PPI scam has uncovered the massive malpractice that the banks and other financial institutions have indulged in with many people making PPI claims to get their money back. If you have been mis-sold a policy, you need to understand about the PPI basics to make a proper claim. The main significant fact you should know in making a PPI complaint is that you should have been mis-sold while taking the policy. Even if you do not have the loan at present, it does not change the fact that you have been mis-sold.

Influence of Financial State on PPI Claims

The financial state you are in will not alter the act of mis- selling any way. Even if you have been bankrupt or taking a debt management plan, you can still make a PPI claim. You should also know that in case you have a debt with the concerned lender in the same account or the debt is related to a past one, the PPI refund you get from the current one can be used to settle the debt. The lender can accomplish this without your acknowledgement, but you can get PPI help if the procedure affects you financially.

Refund Considerations

In case you have purchased a policy before an order relating to the bankrupt state or insolvent state you are in was made, the chances of making a claim is implausible. Irrespective of whether the assets are part of your possessions or they have been discharged, you cannot make a refund.

Making a claim can be done by yourself or with the help of PPI claims companies who specialise in such matters – this would be best if your case or financial affairs are not so straightforward. PPI assistance can be sought from the financial ombudsman services too, but your PPI claims may take some time to be resolved as there are numerous pending cases that are yet to be solved in the PPI fraud.

What to do if you Can’t Repay a Payday Loan

The recent recession drove many families into financial difficulty. In order to make ends meet, many were forced to take out short-term, high-interest loans which they then found they just couldn’t pay back. It may seem like, since you owe the company money, there is little help open to you if you cannot pay it back. In fact, if you are in difficult circumstances and the company seems unsympathetic, there are a number of things you can do to try and improve your situation.

The Problem

Obviously, the main problem with being chased for payday loan repayments you can’t afford is that you are faced with a debt that just keeps mounting up. Not only are you supposed to be paying back this money yet unable to do it, but the high interest rates mean that the debt keeps getting bigger. The problem of paying it back, therefore, seems even more impossible to overcome as time goes on. If you are able to pay back anything, you might find you are barely covering the interest and not even touching the original debt.

On top of this, many people in this situation report that they have experienced overbearing, even bullying tactics from the payday lenders. Excessive contact on home, work and mobile phone numbers along with emails and texts is a common problem. Often, this contains threat-like information about the action they may take if they do not receive their money.

Dealing With These Issues

It is true that you owe these people money. However, this does not give them licence to use whatever tactic they please to retrieve the money. You still have some rights, and there are still laws restricting the lenders. Many of the tactics people struggling with payday loan debts claim to have experienced fall outside these boundaries.

If you are in a difficult financial situation and are unable to reasonably make payments, the payday lender should take this into account. It is a good idea to write to them explaining your situation and proposing a solution such as a more reasonable repayment rate. However, this can seem difficult, and some people have reported that attempts to do so have been simply ignored. For this reason, you might want to use some of the free templates available online. These are customisable letters in the correct format, and they usually encourage lenders to comply by reminding them of your legal rights and the action you can take if those rights are breached. These letters can result in more manageable repayments and sometimes in interest being reduced or frozen, especially if the lender did not take adequate steps to ensure you could repay the loan when they authorised it. Often, this will also serve to stop excessive contact.

If you believe you may be being overcharged for your loan, you should also send a letter requesting they prove the debt to you. If you are correct, they will have to reduce the debt to the appropriate level, and if you are mistaken at least you will know that you are not overpaying.

If you believe the lender you owe money to is operating illegally, it is important you report them to the authorities.

 

Where to Find Personalised Debt Advice

If you’re struggling with debt, there are many things you can do to help make the problem more manageable. Information on many of these things can be found online, and this sort of help might be all you need. However, sometimes you might need to talk to somebody directly and get personal advice about your unique situation. In this case, there are a number of places you can go to get free, impartial, and personalised advice on dealing with debt.

Citizens Advice Bureau

Your local Citizens’ Advice Bureau (CAB), an independent charity, can advise you on dealing with debt as well as a range of other problems such as legal issues. The first CABs opened at the start of the Second World War, and today they are one of the most widespread, readily-available and useful sources of free and impartial advice. You can go to your local Advice Bureau in person and without an appointment, where an advisor will be happy to talk you through your options and rights. Even smaller towns will often have a CAB, either in a full-time dedicated premises or part-time in a local venue such as a town or church hall.

StepChange

Like the Citizens’ Advice Bureau, StepChange is an independent charity devoted to bringing free and impartial advice to those who need it. Unlike the Citizen’s Advice Bureau, they do not have a nationwide network of offices allowing you to seek help in person. On the other hand, they are also more specialised, focussing entirely on debt advice rather than on a range of problems. You can find a selection of highly useful information on their website as well as seeking personalised advice on your specific situation by phone. Their helpline is free to call, including when you call from a mobile. It is open Monday-Friday from 8am-8pm, and 8am-4pm on Saturdays.

National Debtline

National Debtline offers you free advice over the phone, as well as a range of other free services. Their helpline is completely free, and is open from 9am-9pm on weekdays as well as 9.30am-1pm on Saturdays. This allows you to talk directly to an advisor who will give you free advice. There is also a range of information on their website as well as a comprehensive self-help pack. If your circumstances qualify, they can also help you set up a debt management plan or a debt relief order. These services are also free of charge.

3 Ways to Avoid Debt

Debt is a burdensome situation to be in; uncomfortable financially and emotionally. It can be gotten rid of through careful planning though ideally, it is best to avoid getting in to it in the first place.

Here are 3 main tips for avoiding debt related problems.

CUT YOUR SPENDING HABITS

Make sure you do not exceed the budget you have prepared for yourself. Overshooting the budget is a common problem and there can be no easy solutions unless you learn how to cut your spending. Otherwise, expenses will pile up and this will make it very difficult to meet your daily needs.

CHANGE THE WAY YOU SPEND

Changing your spending habits is a good way to get rid of debt. Avoid spending on frivolous, fancy items and ensure you only stick to the basic things. Sticking to essentials is a good way to prevent yourself from crossing the limits of your budget. Ensure that your spending pattern is financially viable.

CHANGE YOUR ATTITUDE

Become more oriented towards saving rather than spending.  See it as a challenge rather than a chore. You need to become more cautious in order to spend well and spend less for quality items.

 

Thus, changing your attitude, changing the way that you spend and cutting your spending habits is a certain way to avoid issues of debt in your life.