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.

Where to Find Money for Extra Debt Repayments

It’s a good idea if possible to repay more than the minimum on your debs every month. This will significantly reduce the amount of interest you end up paying before the debt has been fully paid off, and will help you to be debt-free sooner. However, it may be that you are only just able to make repayments at the moment or aren’t happy paying any more than the minimum in case the rest of your income is needed to cover some financial emergency. If this is the case but you still want to be debt-free as soon as possible, there are a few places you might be able to find some extra money to pay back your lender.

Little Cutbacks

It can be surprising how much you can save by making just small cutbacks in your lifestyle, and these little sacrifices can be used to find extra money for paying off a debt. Let’s imagine Elizabeth stops into a major chain coffee shop every morning on her way to work for a coffee, which costs £2.50. In the middle of the afternoon, she buys a chocolate bar from the vending machine for 80p as a pick-me-up. On the way home, she is usually thirsty so she buys a bottle of mineral water from the vending machine at the station for £1.

If Elizabeth gave up the coffee and the chocolate bar and started refilling her water bottle and taking it with her each day, she would save over £21 a week. Over the course of a year, she would rack up £1118 worth of savings which could be used to help pay off debts. Of course, you can’t be expected to give up every little pleasure but this shows how much small savings rack up. Her coffee alone (a fairly common habit) would save her £650 a year. If she really can’t give up her coffee and chocolate, she could still save most of this money by drinking instant coffee in the morning and buying multipack chocolate bars and taking one to work every day.

Your Possessions

You may be able to get a little extra for repaying debts from selling some possessions. Just as making little cutbacks doesn’t mean giving up every single luxury, so this doesn’t have to involve pawning your family heirlooms and selling your wedding dress. Rather, it means parting with things you no longer need but may still have hanging around.

Gadgets can be some of the best money-makers, but at the same time they depreciate quickly as technology moves on so it is best to get a move on with selling them. Old mobile phones made obsolete by a free upgrade, abandoned computers, and old games consoles can all be worth selling to get extra money to help shift your debts that little bit sooner. If you have any very old items that have been hanging around for many years, such as vintage computers or games consoles from several “generations” ago, their value may have gone full circle and you might find these items are now collectable.

 

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.