You can’t manage your outgoings. But you know the situation is likely to be temporary. So when is the right time to hold your nerve? And when should you look for help with your debts?
Managing your finances right now can feel like the ultimate game of high stakes poker. Do you stick with the hand you’ve been dealt and hope something better comes along to help you out? Or do you fold now to limit the damage? The truth is there’s no one answer that will be right for everyone. But there are options that everyone should at least consider.
Before you place your chips on any of the following options, do seek expert advice.
Look to reduce your outgoings
Banks have been instructed to offer mortgage holidays. Many loan and credit card companies are doing the same. There may be help for you from your local council too with things like Council Tax (although this appears patchy and is not available everywhere).
Although help is available from a number of sources, it’s important to understand what that help entails. A mortgage break of just three months, for example, could cost you hundreds of pounds in interest charges down the line – so don’t just accept the offer of help. Weight its impact up before you make a decision.
Find out more about ways to reduce your outgoings during the outbreak here.
Look at the help that’s available
So far the government has announced help for employees and the self-employed, and whilst there remain holes that need plugging – many gig economy workers, supply teachers and company directors fall between the cracks at present – a large proportion of the population is now supported in some way.
Don’t just assume help won’t be available for you. And don’t assume that, just because nothing was available a couple of weeks ago, there’s still nothing available now. Things are changing rapidly and it could be enough to remove the need to seek debt help.
We’ve summarised the help available here.
Staying solvent during the outbreak
Despite the help available, the gaps in the system and the delays in getting support to the people who need it mean that many could still be struggling with rising debts for some time to come. If that’s you, what are your options?
Should I use my savings to cover coronavirus debt?
Probably. Interest rates have never been lower, so if you have readily available cash in a saver account it’s very likely that the interest you’re paying on your debts will be much higher than anything you’re making on your savings.
Some savings can be locked away with penalties for withdrawal, but many banks are waiving these fees. Check with yours before you withdraw money.
Should I use my overdraft?
Not so long ago we’d have said an immediate yes to that, but many overdraft rates are set to rise dramatically soon. Whilst the monthly admin fee will be scrapped the interest rates will in many cases double. A large overdraft (i.e. £600+) could become very expensive very quickly.
The current crisis has seen banks offer some help – NatWest RBS are postponing the rate hikes for three months. Lloyds, HSBC and Bank of Scotland are offering a £300 interest free buffer. Despite this, we’d still urge caution about dipping too far into overdraft. The changes are still coming – and if you’re caught with a large overdraft when they do, you’ll pay for it.
Check your bank’s rate before you use/extend your overdraft.
Should I get a personal loan?
Despite central interest rates hitting the floor, there have been signs that lenders are raising the interest rates on personal loans as a result of their worry over growing debt levels and the risk that more people will struggle to repay them.
If you’re already struggling with debt, an additional loan is only likely to add to your problems in the longer term. It may also be that finding a loan at an affordable rate proves challenging.
If, however, you don’t have lots of existing debt, a personal loan may help spread the cost of the debts you’re building now, although you’ll need to shop around for an affordable way of doing it.
Should I get a payday loan?
Providing you know with certainty that you can pay it back quickly, a payday loan can help cover short term, low level cashflow problems. BUT these are uncertain times, with the unexpected happening on an almost daily basis. Payday loans are an expensive way of borrowing at the best of times, and these are hardly the best of times. We’d urge extreme caution.
Should I remortgage?
Rates are low right now, which is good news. But many banks and building societies are pulling their riskier offers, meaning you’re more likely to need a lower loan to value (LTV) or a higher deposit than just a few weeks ago.
A remortgage is a big move. It’s potentially a sledgehammer solution that could see you paying interest on what could be a relatively short term debt the debt over many years – so you’ll need to be certain there aren’t other, better options.
In order to get the mortgage approved, you’ll also need to demonstrate that you can afford repayments, which in the current crisis may be considerably more challenging than usual.
Should I look at debt management?
Not as a first resort, but yes if you can’t find the right solution for you elsewhere. There is a lot of help out there for people struggling during the coronavirus. Although there are consequences of taking advantage of some of that help – perhaps in terms of increased interest charges or extended payment terms – much of the help available is low or no-cost, and much of it won’t affect your credit rating when you take it up.
Crucially, many lenders are promising not to take enforcement action during the crisis, so missing a payment or three shouldn’t be the end of the world – providing you tell the lender about it in advance.
In many cases, the help available will be enough to tide people over without needing to resort to more formal debt management routes.
But for others, particularly those who were struggling financially when the crisis began, now may be the time to consider asking for debt help.
When should I ask for debt management help?
Timing is critical. If you can arrange mortgage/loan/credit card help before you miss a payment you’ll protect your credit rating and maximise the help available. That’s unquestionably the best route to follow.
If, however, you’re already missing payments and loans/remortgaging etc are not options, exploring debt management options sooner rather than later can prevent the overall debt growing, limit interest charges, penalties and other damage to your finances, and save a great deal of anxiety.
A range of options are available, including:
IVA or protected trust deed
If you can’t manage your debts, an IVA (in England, Wales and NI) or a protected trust deed in Scotland can help protect you from spiralling interest, stop creditors chasing you and reduce your monthly payments.
There are differences between the two, but both can be very successful at helping people escape debt. They may be appropriate in this case, but it’s vital that you seek advice before you make a decision, because neither an IVA nor Scottish Trust Deed is an ‘easy way out’ and both are long term solutions to what may be a relatively short term problem.
- Both are forms of insolvency and will impact your credit rating.
- Both have significant set up fees (although Scottish trust deeds tend to cost considerably less than IVAs) so may not be appropriate if you expect your debt worries to be relatively small or short term.
- Both require you to have an income. If you’ve been furloughed until your job is reinstated, you may still qualify. If you’ve been made redundant as a result of the coronavirus outbreak, you probably won’t.
Debt Arrangement Scheme (DAS)
A DAS (in Scotland) might be a more flexible option for coronavirus debt. It gives you time to pay only what you can afford – but with the flexibility to resume much higher payments once the crisis is over and your income returns to normal.
A DAS does need to be arranged via an advisor though. Whilst the advisor’s advice may be free there is always a fee for the payment distributor (so don’t trust anyone who says their DAS is free – it isn’t). And unlike much of the help mentioned above, your credit rating will be affected.
Debt Management Plan (DMP)?
DMPs don’t offer the same level of protection as a DAS, IVA or trust deed, but they do offer some flexibility, which may make them the best debt management option during the outbreak. They can provide reduced payments, flexibility and limited impact on your credit rating.
If you can see a point coming when you won’t be able to make your monthly repayments, don’t wait to default. Explore options to help you manage your debts and cut your monthly repayments.
The find the best route out of debt for you, contact us.
Trust Deed Example
Example Unsecured Debts
|2||Credit card 1||£6,812|
Your Monthly Repayments Would Be
a Scottish Trust Deed £748
(total contractual repayments)
a Scottish Trust Deed £295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances. For more information on our fees click here