Archives for Debt

Is it buy now pay later or buy now pay more?

There are many things that happen in life which need quick and decisive action.

Things like the washing machine breaking down when you need to get the kids’ school clothes clean, the car conking out which you avidly rely on to ferry you to work every day or your TV going on the blink when the race is about to start.

If you have emergency funds you will be able to get these things repaired or replaced but what happens if you don’t have the money to hand or don’t have insurance to cover it?

One option a lot of people consider is to buy new on a finance.

It seems these days that nearly every retailer out there is offering some kind of finance deal and one such deal that remains popular is ‘buy now pay later’.

For small purchases this scheme isn’t really fit for purpose but for buying big items such as white goods for the kitchen, high-end electrical goods or furniture it can come in handy and work out to be a sensible option by spreading the cost.

The premise of buy now pay later is as simple as it sounds. You buy a product now and start paying for it at a later date.

Often these schemes are run over the course of several years. You could have a year where you pay nothing and then begin paying off the balance over an additional 48 months for example.

Sounds great but how do you know you’ll be able to afford the repayments in a year’s time?

In life you can never know what is around the corner so taking out these deals is always done with a little bit of speculation thrown into the mix.

According to DirectGov’s guidelines for borrowing, any person taking out credit should first ask themselves whether they can realistically make all the payments and whether they can get a better deal by shopping around.

That’s sound advice, but sadly many people sign up to agreements on impulse or because they just can’t say no to that charming salesman. Logical thinking goes out of the window and before they know it they are saddled with a debt they neither need nor can afford.

With so many retailers offering credit, people who are already stretching their budget can soon find themselves getting behind with their payments.

Something else to be aware of when looking at credit options is the total cost of the item. While there are interest free offers out there (particularly from the large furniture stores), a large proportion of finance deals still work on the basis that you will be charged interest on your debt.

This is when ‘buy now pay later’ becomes ‘buy now pay more’.

Interest charges aren’t the only way in which retailers offering credit squeeze a few extra pounds out of consumers. Often the items offered on monthly terms will be priced much higher than the product’s actual RRP.

Despite this, recent figures show that the number of people buying items on monthly credit terms has risen sharply in recent years.

When the credit crunch hit in 2008, millions of households found themselves without the level of disposable income they had previously enjoyed and understandably needed to look at other ways to pay for things.

As a result the number of items like sofas and televisions, bought on store credit rose by 24% during the first three months of 2009 and has showed little sign of slowing down since.

For people looking at taking out finance, the advice is clear and simple; only do it if you are sure you can afford the payments and always make sure you check to see if there is a better deal before putting pen to paper.

Debt advice is available for people who find themselves in sticky situations but the problems that lead them there are best avoided whenever possible.

Unforeseen circumstances can lead to unavoidable turmoil but with careful financial planning it is possible to be prepared for the worst.

Economic Recovery Painful for All

Article provided by Debt Support Trust – A registered charity.

The economic recovery in the UK is slow and painful. People and businesses have been feeling the strain for almost three years now and it doesn’t show any sign of easing up.  As inflation between March and April continue to rise, the increased cost of living in the UK will mean that more people will be closer to the breadline than ever before.

The recent rise in inflation based on the Consumer Price Index (CPI) from 4% to 4.5% was a result of the increased cost of transport, alcohol, tobacco and the increase in VAT. According to the CPI, the increase was offset by the price of clothing and footwear, which reduced by 1.3%.

The Ernest and Young Item Club has found that consumer spending could slow growth for the next ten years whilst people try and repay the debt they already have.  In 2010/2011, there were 148,916 insolvency solutions within the UK. At present, a property is being repossessed every 17 minutes along with the average household owing £8,144 excluding mortgages. 

For the UK economy to move forward and become stable, consumer confidence must improve and debt problems need to be dealt with.  People are deciding to save their hard earned cash and pay off debt which will hinder the economic recovery for businesses. Statistics from Credit Action explain

– people are paying £180m in interest daily
– 8,004 people are visiting the Citizens Advice Bureau each working day for help with debt
– 1,392 people are being made redundant each day with 847,000 people being unemployed for over 12 months.

Getting the right debt help

There are a number of debt solutions available for people struggling with debt. These debt solutions include;

Debt Management Plan: This is an informal debt solution which allows a person in debt to repay all of their debt over a longer than agreed period of time. The creditor and debtor can cancel the agreement at any time.

Protected Trust Deed: This is a Scottish debt solution. The person in debt would make a monthly payment towards their debt usually for 3 years. If all requests are met then the person in debt can repay a percentage of the money they own, with the rest being cleared. A person must be able to repay at least 10% of the money they borrowed.

Individual Voluntary Arrangement (IVA):  This debt solution is applicable for people living in England, Wales and Northern Ireland.  People owing £15,000 or more in unsecured debt and able to pay £200 a month towards their debt each month may be suitable for an IVA. The IVA usually lasts for 5 years and enables the person in debt to repay as much money as they can over this period, with the remaining debt being cleared (a minimum of 25% of the debt must be repaid).

Bankruptcy: Another debt solution is bankruptcy.  Bankruptcy is suitable for people who cannot repay any of their debt, or someone unable to repay enough to meet any other debt solution. If a person has an asset, such as a house, they will be required to release the equity.  

The recovery process

Rising living costs are likely to delay the economic recovery process as consumer confidence continues to remain low. However, as people return to spending money on holidays, new cars and other luxury items we will see an increase in employment and businesses returning to making profit.

People with serious debt problems can begin to rectify their financial situation by receiving debt help from a debt advice charity. The sooner a person receives help the quicker their finances can start the road to recovery and less likely they will be to face bankruptcy.

Holistic debt advice can be provided by Citizens Advice Bureau for face to face debt advice or by Debt Support Trust for telephone debt help.

Coping Classes – the bigger picture.

A recent report launched by Friends Life finds that the combination of the recession and spending cuts has brought about profound changes in the way in which generations within families support each other.

This information comes to the fore as 44 tax and benefits changes are introduced which could wipe billions off household incomes over the next year.

Rather than finding the traditional “sandwich generation” model, the ‘The Coping Classes’ report finds middle income households increasingly relying on their retired parents for financial support, while remaining more committed than wealthier or less well off households to helping their children financially.

Key findings:

  • 40% of middle income or ‘Coping Class’ households are turning to their retired parents for help in the face of unique and unprecedented financial pressures. 
  •  57% of middle income parents help or expect to help their children to buy a house, compared to just 33% of other parents (who ranked help with getting married highest).
  • The recession has left over half (59%) of the Coping Classes unable to provide for themselves and their families for longer than six months if they lost their main source of income.

Fuelled by the fear that over half of people unemployed in the UK have been so for over six months (52%), this group is now putting a series of coping mechanisms in place to stave off the threat of a potential financial survival gap, including:

  • Radically changing their attitude towards debt: 84% of the Coping Classes say they are committed to avoiding taking on more debt this year, and nearly three-quarters are putting plans in place to pay off most of their debt within ten years.
  • A renewed commitment to retirement funding: Almost half of the Coping Class identify saving for retirement or for a rainy day as the main reason for saving compared to the rest of the adult population who put saving for a holiday or travel top of the list. Nearly 60% of the Coping Classes believe it is more important than ever before to invest in a pension. 
  •  The Aleksandr Effect: the Coping Classes lead the way in shopping around for the best deal. Encouraged by the nation’s favourite meerkat, 70% of them use price comparison websites (compared to just 61% of other adults). According to the report, this has created an emerging social kudos attached to getting the best deal, with more than one in four of the Coping Classes claiming people go to them for financial advice as a result of their savvy approach. 
  • Looking after the pennies: overall there has been a 20% increase over the last two years in the number of households who say they are ‘carefully budgeting’ their household spending, with 95% of those that do budget maintaining that they adhere strictly to their budget plan

Comments on the findings from David Hynam, Director of Operations at Friends Life:“The recession has forced the Coping Classes to abandon their role as the ‘sandwich generation’, providing financial support to both their grown up kids and their retired parents. Many are now finding that it’s their parents – typically retired baby boomers who may have escaped the worst effects of the downturn and government cuts – who are helping them out.”

“Despite relying on their retired parents to act as a financial buffer, the Coping Classes are still committed to helping their own children but it’s now all about hand ups, not hand outs. What we’re seeing emerging – fuelled by the recession – is a new model of downward assistance, with each generation giving a leg-up to the one below. Practical parenting is taking on a whole new meaning, extending beyond those first few formative years to a whole-life role.”

“Five years ago the Coping Classes were comfortably off, but the recession and the effects of public spending cuts seemingly tilted against them has changed their status. We’re now seeing them take clear, decisive and urgent steps to address this.”

“Most striking is the new attitude towards debt. We’re witnessing a slow march down the debt mountain, which will have huge implications for financial planning and for the financial services industry.”

My thanks to the people who sent me this information.

Most of use live in our own little worlds and even friends don’t usually talk about money so it really makes a difference when we see the bigger picture and realise the situation a lot of people are in.

Risk Based Pricing & Responsible Lending – some thoughts…

In a nutshell risk based pricing is the reason why people with a poor credit score pay higher interest rates for credit.

It is standard practice to charge a higher rate of interest to a customer who is considered ‘higher risk’.

The price is based on the perceived risk involved in lending money to someone who might not have a very good track record with credit.

I’m struggling to come up with a really good argument for why this is a good idea…

People with either a history of badly managed credit or with no provable track record of managing credit could quite easily be considered higher risk than a person with exceptional credit management skills but why do they pay more for credit? How does that lower the amount of risk to the lender?

Risk based pricing combined with relaxed lending led to people with poor credit being given loans and mortgages at over the top rates. This led to missed payments, defaults, repossessions and a small hiccup in the global supply of credit.

I see that as a huge flaw with risk based pricing.

Now mortgage lenders in the UK are looking much more at affordability when it comes to borrowing in an attempt to control the amount of risk they are exposed to. Income multiples are only a guide these days and some lenders only let you borrow at a low rate if you can prove you can afford a mortgage at a higher rate. Other lenders insist on a certain amount of disposable income after essential expenses are paid.

This is a more responsible way to lend but these are the rules that apply to people with good credit!

At the moment, people with poor credit are still struggling to borrow money.

Money lenders are still trying to avoid risk.

In the past the theory was the reward should reflect the risk…

That makes sense if you’re talking about the adrenaline rush from jumping out of a plane.

However this school of thinking traditionally applies to investing which, also makes sense when taking a gamble on the future success of a business based on the business plan, market conditions and potential for growth.

When money that gets invested in financial institutions it ends up as credit and to reflect the risk of lending to poor credit customers and improve the reward the investor is offered a higher rate of return and the borrower is charged a higher rate of interest.

Who would invest in a business if the business plan was to lend money to high risk customers?

See link:  > Collateralized Debt Obligation <

Risk based pricing failed and it should not be used to entice hungry investors into high returns at the expense of others.

Basing lending on affordability and credit history is a more responsible approach.

People with poor credit should pay the same rate as everybody else (or if it’s increased the margin should have a maximum and reasonable threshold) but the amount they can borrow should be restricted.

A borrower with a poor credit history wishing to buy a house would need a bigger deposit as an incentive to save and manage money and to ensure they have a quantifiable interest in the property they are buying.

Credit card issuers can help people with poor credit by only extending small balances and really highlighting the fact that cards are only for short term borrowing and if credit is paid back quickly there is no interest to pay.

Some people will still max out their cards but if their credit limit is low the risk to the lender is low.

Borrowers need to be educated before they themselves take a risk and enter into a credit agreement.

After years of slack regulation and easy money the public’s perception of credit needed to change and that has happened to some extent but lenders should understand it was not the public that was at fault in the past and with a more sensible and responsible approach to lending the adverse credit market could be opened back up and actually help repair the damage caused and overcome the stigma attached to past practices.

Insuring Debt is Stupid

With talk of £300BN being used to insure banks bad debts it rang alarm bells because it’s one of the prime factors that has seen Western economies fall to their knees.

Do you know what a ‘Credit Default Swap’ (CDS) is?

It’s a bit like an insurance policy to protect against defaults on debts. But it’s not really insurance it’s just an agreement to pay a regular amount in return for a lump sum if a default occurs.

Payment protection has been around for a long time as a consumer product which will protect a borrower if they lose their job or can’t work due to sickness, disability etc. It’s also an extra cost on top of the borrowing so needless to say, people with limited budgets probably wont buy it.

But thanks to CDS’s it’s possible for a third party to ‘protect’ a debt.

Wikipedia says it well but in basic terms, Company A can ‘protect’ the debts of Company B even if there is no association between the two companies.

It’s a bit like betting on whether or not a company will default on its debt obligations. If it does, Company A will be entitled to a payout. If it doesn’t, Company A will have paid ‘premiums’ and received nothing in return apart from possibly some peace of mind.

“By the end of 2007, the CDS market had a notional value of $45 trillion”

Yes, that’s $45 TRILLION.

The US Gross Domestic Product was only worth $13 trillion in 2007.

OK, so not all of the debts associated with CDS’s will default but some of them have, namely ones tied up with the US adverse mortgage market.

I read somewhere as many as 1 in 10 US mortgages are likely to default between now and 2010. There are currently approximately 70,000,000 US homeowners.

I’m not sure of the specifics but a default doesn’t always lead to foreclosure but will a CDS contract pay on default as opposed to foreclosure?

If it does, that’s nearly 7,000,000 US homeowner who may default.

Once again I don’t know the details but if a CDS pays the full amount of the debt and the average house price in the US is $280,000 (courtesy of economagic.com) then we’re talking:

$280,000 x 7,000,000 = $1,960,000,000,000 nearly 2 trillion dollars.

And that’s just the mortgage defaults. In this current climate business are also defaulting on their obligations.

So to suggest insuring bad or toxic debt in a climate which is bound to see more defaults the Government must be mad!

Lenders assess the risk and price their loans accordingly. It’s their risk and they factor it into the calculations for maintaining their capital adequacy. If people default, the lenders suffer and so they should because it’s THEIR RISK!

OK, so regulators have a lot to answer to as well but clever banking minds should have been able to see the increased risks caused by deregulation of the past?

But allowing other people to ‘play’ the market and gamble (with other people’s money in many instances) and then allowing that trading to become worth over 3x the US annual GDP…. Without regulation…. Someone, somewhere (who is probably very rich by now) should have trouble sleeping at night.

I admit, I’m by no means an expert on any of this. I have been reading and researching in my spare time but even I can sense that there is still more trouble ahead….

Is an IVA the best solution?

This is a question that has arisen a few times and the answer appears to be, maybe not.

There are certainly options to consider before making the decision and those are:

Remortaging – As a homeowner, I can see that it makes the most sense to top up a mortgage to get at the equity neaded to clear debts. This way I could extend my mortgage to 25 years or more and spread the cost to reduce my monthly outgoings.

Debt consolidation loans – either secured or unsecured loans can be used to consolidate debt depending on the amount of debt. An unsecured loan will cover debt up to £25,000 whereas a secured loan is more dependent on the amount of equity in your home. Due to the security attached to secured loans people with less than perfect credit histories can often be accepted.

Either by remortgaging or consolidating debt it would be possible to prevent disaster, reduce outgoings and even allow for a little bit of saving again. For people stretched beyond their means this could represent a very favourable option.

With an IVA, your debt is negotiated down to a more affordable limit. The people you owe money to have to meet with your representatives and discuss your case. If they agree your debt is reduced and you are committed to making the repayments you can afford based on your current situation.

If you default on an IVA you could still lose your house.

OK, so losing your house is the last thing the government wants to see happen so it is possible to renegotiate an IVA at a later date if you still can’t manage it. But is it ever worth taking the risk? It’s your house we’re talking about here!

I’ve also tried to find out what kind of a stain an IVA leaves on a persons credit record but that information seems to be slightly buried for now, or at least not blatant and remains to be discovered and appended to this post.