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.

Three Ways Not to Borrow

Sometimes, you may need to borrow in order to make ends meet. Sometimes it can seem like you have no choice but to borrow new money to pay off older debts. However, there are several kinds of borrowing that you should not consider unless completely, unavoidably necessary. The types of borrowing that you should not consider except as an absolute last resort include:

Payday Loans

Payday loans are essentially designed as short-term products, and are therefore high interest. Unless you are absolutely, 100% confident that you can pay them back when you receive your next paycheque without putting yourself in financial difficulty, steer clear. Even if you are completely certain that you can do this, there is still a strong chance you can find some alternative solution that does not carry the same high interest rates. Those who can’t pay back the loans within the (very short) terms often get caught in a spiral of taking out fresh loans to cover the old ones. This means the high interest rates designed for short-term borrowing get applied over a much longer period, and the debt becomes rapidly much harder to repay.

Secured Lending

Secured loans can be tempting because they offer better interest rates on account of being less risky for lenders. When you borrow using a secured loan, you offer some valuable object as security, usually a house or car. If you are unable to repay the loan, the lender can take possession of that object to recoup their money. This is a very significant risk. If you have trouble repaying the loan you will not just accrue interest that you will eventually have to pay, but will risk losing your car or even your home. Mortgages and car finance options are technically secured loans, but for obvious reasons these are excluded from the rule of avoiding secured lending.

Logbook Loans

Logbook loans are a very specific kind of secured loan, using your car as security. However, they deserve special mention as they are a particularly risky kind of loan to take on as the lender essentially owns your car until the loan is repaid. If you cannot keep up repayments, the lender can promptly take possession of your car without the need for a court order. On top of that, where most forms of secured lending have low interest rates, logbook loans tend to offer very high interest rates. In essence, a logbook loan amplifies the risks of any other loan secured against a vehicle and does not even offer the attractive interest rates you would usually get in return. The only factor they do have in their favour is that they are accessible to people with poor credit ratings, and unfortunately this can make them look tempting to people who are experiencing financial difficulties.

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.

Church of England Continues to Dabble in Financial Support

Earlier this year, the Church of England hit headlines when the Archbishop of Canterbury spoke out against high-interest payday loans, particularly when given to the poor and vulnerable. Specifically, he vowed to “compete [them] out of existence.” A move into finance might seem unusual for a church, but he advocated that supporting credit unions was a way to help some of the most vulnerable people in difficult times, and therefore insisted that this was the direction the church should take.

 

After an initial flurry of media interest in these surprising and at times controversial comments, things seemed to go quiet. Now, however, it has become clear that this was not because the Church of England had changed its plans or lost interest. Recently, the Church of England website introduced a series of pages providing comprehensive information about credit unions, the services they offer, and why they are an alternative to short-term, high-interest loans that lead many people into debt.

Though the website of a religious body was not, a few months ago, where you would expect to go for financial advice, the information provided is extensive and covers a range of topics based around the issue. This shows that the church remains serious about playing a part in this industry and helping combat personal debt.

Are Credit Unions Really Useful?

Of course, this is now the pertinent question, and the one that decides whether the idea of a Church dabbling in finances is actually likely to succeed. The answer is that, though credit unions are not well-known for many people they could be an extremely useful tool. In particular, they can be useful for the purpose the Archbishop seems most concerned with – averting the need to build up high-interest debts.

A Credit Union will provide many of the same services as banks. They will be run by and for the benefit of the members, with proceeds shared and with the members’ interests put before profit. They also offer loans, which are designed to have reasonable interest rates and to be tailored to match the realistic repayment prospects of the recipient. This makes them a more manageable alternative to the notoriously high rates of payday lenders, and significantly less likely to cause unmanageable debts. With loans below £2000 – the levels that compete with payday lenders – they are considered the best-value option, though above this level they are usually neither better nor worse than standard banks.

UK House Prices Set To Rise Even Further

UK house prices, according to the Halifax’s latest house price survey, have risen by 5.4% in the year to August. This is the highest annual rate since mid 2010. The measure also revealed the average price of a house also went through the £170,000 mark for the first time in half a decade. One thing to note, is that the figures are still very much below the peak of the market in August 2007, when the average price was almost £200,000. The Surveyors explained that housing market activity was up due mostly to an improving economy, low interest rates, and government-backed schemes such as the much-loved Help to Buy. This scheme offers buyers a government-backed loan of up to 20% of the price of the property.

Nationwide reported, earlier this month, said house prices in August were rising at an annual rate of 3.5%, slightly lower than the rate in July. The Nationwide survey gains its figures by comparing the prices in one month with the same month a whole year ago. The Halifax survey, on the other hand, compares a three-month period with the three-month period in the previous year. The Halifax survey has estimated that the average price of a house or flat in the UK is currently £170,231. The last time average house prices were higher than £170,000 was in September 2008.

Mortgage approvals for house purchases, which are often used as an indicator of completed house sales, rose by 10% between the first and second quarters of 2013. In July of this year, there was a landmark 60,600 approvals made. This was the first time the number has exceeded 60,000 since 2008. The rise in market activity, prices, and the Help to Buy scheme, all have increased fears that the UK could be heading for another property bubble. Mark Carney, governor of the Bank of England, said last month that he was “acutely aware” of the risks, and had a “toolkit” of measures he could employ to combat the seemingly unrestrained mortgage lending.

Matthew Pointon, property economist at consultancy Capital Economics, expressed his opinion: “A short-term imbalance between housing demand and the number of homes on the market is driving price increases. But the rise in wholesale interest rates seen over the past few weeks may soon start to feed through to mortgage rates, dampening demand.” Some experts have pointed out signs that mortgage rates may just have bottomed out, with some lenders increasing rates earlier this week.

How the banks haven’t been so ethical – PPI

Payment protection insurance is a type of insurance policy that repays loans or credit card payments when customers come across financial difficulty caused by sudden sickness, accidents or injury. Like any financial product, PPI had certain terms and conditions that had to be met to enable a claim on the policy, and had certain exclusions that applied.  These however, were often not relayed to customers, and neither were the eligibility criteria.  Those who were self-employed or retired, for example, were not eligible for a PPI policy so they shouldn’t have been sold one. But they were, and millions of customers were duped into purchasing this insurance and paying additional premiums on top of their borrowing repayments.

When the number of complaints about PPI reached a high volume, an investigation found that PPI was mis-sold to customers by banks and other lenders in about 90% of cases.  The law took the side of the consumer and the unethical practices of the banks were put in the spotlight.  The High Court ruled the banks were to refund all customers mis-sold the insurance policy, with interest added to the compensation amount too.

The Lloyds Banking Group takes the crown for the largest amount of miss-selling of PPI policies. By the end of 2012 they had spent approximately £4.3bn in compensating their PPI claims victims. The Lloyds Group had also been fined however, at the cost of millions, for delaying compensation payments to customers.  Like many of the banks, they were very quick to take people’s money and to demand repayments and induce fees and fines where it suits them, however when it comes to paying up themselves they are far from prompt.  HSBC and Barclays have also allocated millions to repayments for mis-sold PPI.

If you have been affected by mis-sold PPI, seek to claim your money back now.  Get your claim in as quickly as possible as the banks are doing their best to try to force a deadline for PPI compensation payments to customers. This is worrying as many customers (millions who still don’t even know they have PPI) are yet to make a claim.  Check your loan or card agreement now. To make your claim, see here on how to proceed.

The average payout amount for successful PPI claim compensation is £3,000 – an amount that could make all the difference to so many individuals and families out there today.

Debt consolidation – An opportunity to pay off debt and save money

One of the most popular debt solutions till date happens to be debt consolidation. It’s a rather simple process that enables you to pay off a number of debts in one go and you’ve got to make only one payment each month. This is especially beneficial if you’re struggling with multiple debt payments. Moreover, keeping a tab on several debt payments tends to take a toll on your health as well without really getting you anywhere as far as reduction in your debt burden is concerned. Read on to find out more.

The process of debt consolidation

Basically, the process of debt consolidation is nothing but the act of combining various loans and liabilities into one single loan. It can also mean the act of taking out a new loan to pay off a number of other debts. If you’re looking forward to consolidate your debts, then it’s best if you did it to attain a lower interest rate, or perhaps the hassle free dealings of a single loan.

Debt consolidation happens to be pretty common amongst individuals as well as companies. Companies which have credit card problems go forward and combine all their debts into one. This provides more ease in terms of repayment. Individuals find it advantageous for the same reason as well as for the fact that for debts like credit card, they can get the high interest rates off their back.

How to save money by consolidating debts

Consolidating debts into one monthly payment is rather beneficial, especially if you wish to negate the negative effect of debt from your life. One of the best methods of helping to alleviate the stress of debt would be to make the payment option more convenient. Debt consolidation helps you do that and it has also got the potential of saving money in terms of interest as well as fees.

1. Calculate outstanding debt: The very first thing you’ve got to do is calculate your outstanding debt. Go ahead and collect all your statements which list the secured as well as unsecured debts including your credit card debts and loans. Add them up and you’ll know the total amount that you owe.

2. Take out an equity loan: You could take out a home equity loan or a line of credit. In fact, use your home as collateral to get a secured line of credit. Try getting the best interest rate by applying at various financial institutions. It’s imperative that the loan happens to be greater or equal to your total debt amount, for that’ll enable you to make a single monthly payment.

3. Transfer balances to one card: As for your credit card balances, then try transferring all the balances to one card. There are quite a few companies which would offer no interest or low interest credit cards that are specifically meant to cater to the debt consolidation process.