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.

Is Student Debt Really Debt?

Lots and lots of young people, as well as some not quite so young ones, are getting geared up to start university next month. Lots of others ended their university days just a couple of months ago. Both starting and finishing a degree can make for exciting times, but one of the biggest downsides of getting a degree is generally considered the amount of debt you leave with – generally something in the order of tens of thousands of pounds.

But is student debt really debt, in the sense that we generally understand? Obviously it is debt in the simple sense that you owe money, but there are some very important differences from other forms of debt. Understanding these, and not treating student loans in the same way as any other debt, can potentially save you a lot of money in the years following your graduation.

Repayments

One of the biggest differences between student loans and other forms of debt is the way that repayments work. Repayments are taken automatically from your wages when you work with the option to make additional payments voluntarily if you wish, which makes things nice and easy. More important, though, is the fact that repayments are only taken when you earn more than a certain amount (currently £17,335), meaning that if you have not yet found a job after graduation, start off earning less than this, or spend any time between jobs then there are no compulsory repayments whatsoever.

Write-off

The most important difference for many is the fact that student loans can be written off – something that is rare for any other form of borrowing. More to the point, if you have not repaid your loan after a certain time (for England and Wales, this is 30 years after you become eligible to repay if your course started any time after September 2012), then it will be written off. This is a huge difference, and where a lot of people go wrong by treating a student loan like any other kind of debt.

The Real Difference

But what do this differences mean in practice? Well the biggest factor is the debt write-off after 30 years (35 in Scotland assuming your course started in or after September 2007). Many people treat their student loans as they would any other debt. With most loans, it is ultimately worth paying back more than the minimum if you can because your debt will be shifted sooner and you will accrue less interest. Working on the same logic, it is common for people to make voluntary extra repayments towards their loan or to make payments voluntarily when they are not earning enough to be required to make compulsory payments.

However, as many as three quarters of students may never end up paying off their debts in full before they are written off. This means that the majority of students, by making extra repayments, would simply the amount they repay at the expense of the amount that gets written off. In other words, they are effectively paying extra money.

Of course, this comes down to personal circumstances. If you think you are likely to end up paying off the full amount before it is written off, then the logic of any other loan applies and paying sooner will reduce interest. If not, however, then you are best letting your future self take full advantage of the write-off.

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.

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.

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.