Thoughts on Loan Debt

Most people will borrow at some time in their lives. Perhaps the biggest loans we will have will be as a mortgage to buy a home but many will also borrow to buy a car, caravan, boat or to go on holiday. Many will incur debt through general spending on credit cards and although this is an expensive way to borrow to many it is unavoidable.

The debt market is now well developed and despite market setbacks experienced over the past few years is widely accessible to most with good credit histories. Even students are expected to borrow to finance their way through college or university with many graduating with debts of over £25,000. At least they have access to a relatively cheap source of borrowing with their loans only being rapid once they start earning over £15,000 per annum and then at a fixed 9% of earnings above this limit. In the meantime the rate charged on the loan is linked to RPI meaning that it has been amongst the cheapest source of funds available. However, with RPI set to increase in coming years this position may change. If the student loan is not fully repaid after 25 years then any balance is automatically written off. Payments are taken directly through the tax system and deducted by employers at source meaning there is no discretionary option to spend the money elsewhere!

Smaller borrowings will be as unsecured fixed rate loans. That means that the amount of interest charged for the loan will be calculated and added on day one and is fixed for the term of the loan. This is a common and typical way of funding cars, holidays or other general home improvements for amounts up to £7,500 but for higher earners can be up to £25,000.

Larger loans, mostly above £15,000, will be on the basis of some form of additional security being pledged. This is usually in the way of a second mortgage on any free equity value in a house or home. With all secured loans the lender has recourse to the security if you fail to keep up payments. That means that you could lose your home if you fail to keep up with the repayments.

Debt consolidation loans have grown in popularity in recent years as borrowers seek to take advantage of relatively low fixed rate loans to repay one or more higher rate facilities such as credit card balances. By carefully structuring a new loan the amount of net monthly payment can be reduced thus easing pressures on family finances. There are many companies offering consolidation loans to make sure to shop around and seek out the best rate, lowest fees and optimal term to suit your anticipated budget for the coming years.

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