Everything you need to know about debt

Finding your way out of debt can be difficult, but there are products and services out there (not to mention some life-hacks) that can make it easier. Learn how to deal with debt and take charge of your finances with our guide.

Debt isn’t a dirty word. Unless you’re one of a privileged few, debt is part of life. From running up a credit card bill at Christmas to borrowing hundreds of thousands to buy a home, living with debt is something you’ll probably have to deal with at some stage.

But when debt gets out of control it can place you under serious financial and emotional strain. Let’s take a look at the different types of debt and how you can deal with them. There are plenty of resources online including charities and professional advice services that can give you impartial advice to help get your finances back on track.

What is debt?

Debt is money you owe to a third party, typically a bank, credit card provider or some other type of lender. You get in debt when you borrow money to purchase something, for example a home or car, or you use a credit card to spend money that isn’t actually yours.

When you borrow money you need to pay it back, but as well as the amount you borrow, you will normally need to pay interest that accrues on your debt.

Some common types of debt

  • Mortgage debt

    The vast majority of us will need to borrow to purchase a home at some stage. Taking out a mortgage could see you borrowing several-hundred-thousand pounds, and so will probably be the biggest debt you have to deal with throughout your life.

    Because mortgage debt is so large, the interest charges on the money you borrow add up to a significant amount over the life of your loan. You’ll also spend many years paying off your mortgage, so financial discipline is needed. Making extra repayments, if allowed, as well as regularly reviewing your mortgage to see if you can get a better interest rate elsewhere, will help you clear your debt faster.

  • Credit card debt

    The instant gratification of credit cards can make it easy to spend money without thinking about the consequences. Unfortunately, there’s a sting in the tail of every credit card purchase you make and once interest charges start to accumulate, your debt levels can quickly rise. With low minimum monthly payments, even a small debt can drag on and on, and you could end up paying way over the odds in interest.

    Credit cards charge some of the highest interest rates around, with some cards attracting rates as high as 30%. And if you’ve run up a hefty bill on more than one card, the level of debt can soon skyrocket.

    Persistent credit card debt

  • Personal loan debt

    In life, sometimes you need fast and easy access to a lump sum, for all manner of important purposes. Whether it’s buying a car, paying for a wedding – the money from a personal loan can be used for just about anything.

    If the loan is secured by an asset, for example if your car loan is secured by the car you purchased, you run the risk of the lender repossessing the vehicle. While there’s no such risk with an unsecured personal loan, their higher interest rates can end up costing you thousands if you don’t pay your debt off quickly.

    Short-term loans, which offer short-term financing solutions and quick access to cash, can often seem like an attractive solution if you’re in urgent need of funds. However, they come with extremely high rates and can lead you deeper into debt. You should consider applying for a short-term loan only if you have no alternatives.

  • Business debt

    The old saying that you’ve got to spend money to make money holds true for most businesses, but sometimes it can result in a substantial amount of business debt. While you need to spend money to buy stock, expand into new markets and grow your business, this often involves borrowing money to access the necessary capital.

    From business loans and business credit card bills to all the other overheads involved when starting and running an enterprise, it’s possible to get in over your head – especially if the economy takes a turn for the worse.

    If business debt gets too much for you to cope with, it’s important to take action sooner rather than later. Prioritise your payments, consider debt consolidation loan options, and seek professional financial advice to help you get back in the black.

What are the different ways of dealing with debt?

If you’re struggling with debt, there are a number of options available to help you take charge of your finances:

  • Debt consolidation personal loan

    If you’re paying interest on multiple debts and you’re struggling to make repayments, it might be time to consider a debt consolidation loan. Consolidating debt means taking out one larger loan to pay off all your smaller outstanding debts. Designed to help you take control of debt, these loans allow you to roll multiple debts into one loan, meaning you only have one monthly repayment rather than several. Ideally in the process you can consolidate high-interest-rate debts to a lower rate.

    If you decide a debt consolidation loan is the right option for you, make sure to compare a range of loans and only borrow from a reputable lender.

  • Balance transfer credit card

    Balance transfer credit cards allow you to transfer your existing credit card debt over to a new card. You will then pay low or 0% p.a. interest on that balance for a set introductory period, such as 6, 12 or 20 months. This means you can avoid high interest charges and consolidate your debt, providing significant savings and giving you a window to pay off the money you owe.

    However, make sure you’re aware that a one-off balance transfer fee may apply, and these cards usually also charge an annual fee. Once the introductory period ends, the low or 0% p.a. interest rate will revert to a higher rate.

  • Consolidating debts into your mortgage

    Remortgaging can help you find a better interest rate on your mortgage, but it can also be used to help you consolidate debt. By remortgaging to a debt consolidation mortgage, you can combine credit card and personal loan debt with your mortgage, resulting in one monthly repayment.

    You’ll need to closely consider the interest rates and fees offered when remortgaging, making sure to compare loans from a variety of lenders. You should also be aware that consolidating short-term debt into a mortgage with a 30-year term may not work out to be the most cost-effective option in the long run.

  • Debt Management Plan

    Debt management plans are a service provided either at a cost by debt management companies (DMCs) or for free by a charity (such as StepChange). With a debt management plan you’ll make a monthly payment to the debt management service, who will then distribute the funds between your creditors, effectively consolidating your loan. With a debt management plan it may also be possible to suspend interest on your debt.

  • Individual Voluntary Arrangements

    Individual Voluntary Arrangements are government-backed arrangements between those struggling with debt (up to £15,000) and their creditors. You’ll make regular payments to an insolvency practitioner, who will divide the funds between your creditors, effectively consolidating your debt. Typically, the interest and charges on debts will be frozen during the term of the agreement.

    Citizens Advice offers free, confidential advice and a live chat service where you can ask questions about individual voluntary arrangements, and whether or not they’re suitable for your personal situation.

  • Administration Order

    An Administration Order is a way to deal with debts of less than £5,000 to multiple creditors, if you have a county court or High Court judgment against you and can’t pay in full. You can apply to your local court, who will decide the terms of the order. Court fees will be payable.

    Much like a debt management plan you’ll make a monthly payment to your local court, who will divide the funds between your creditors. Like a debt relief order, it will be visible on your credit file for six years.

    You can find out more about administration orders by talking to an approved debt adviser such as Citizens Advice.

  • Debt Relief Order

    An alternative to bankruptcy, Debt Relief Orders (DRO) can gain you a reprieve on some debt repayments and action from creditors for a fixed period – normally a year.

    Due to strict criteria (such as minimums for assets, income and level of debt) debt relief orders aren’t an option for everybody. Additionally it will be visible on your credit file for six years.

    You can find out more about debt relief orders and apply at an approved debt adviser such as Citizens Advice.

  • Bankruptcy

    If you’re unable to pay off your debts you can apply for bankruptcy. Bankruptcy is a court order that declares you legally unable to repay your debts. This step is a last resort and should only be taken after you’ve explored all other debt consolidation options and sought professional advice. If you are declared bankrupt you are obliged to follow bankruptcy restrictions, your assets may be used by the court to deal with creditors and your credit record will suffer long-term damage.

    You can apply for bankruptcy online at www.gov.co.uk, and an “adjudicator” who works for the Insolvency Service will decide if you should be made bankrupt.

How can a debt adviser help you?

A debt adviser can help you find ways to manage your debts, even if you think you have no spare money. Using a debt advice service can make you feel less stressed and anxious, and more in control. What’s more, there are plenty of free services out there – here are just a few:

Citizens Advice
Citizens Advice provides free, independent and confidential advice to help people overcome their problems.

MoneyHelper (formerly The Money Advice Service)
MoneyHelper is an independent service, set up by government. Its services help people manage their money directly through free, impartial guidance. It can advise people with debt problems.

National Debtline
National Debtline is a debt advice charity providing free, impartial and confidential debt advice and support for people with money worries and debt problems.

Formerly the Consumer Credit Counselling Service, StepChange is a charity offering free, confidential advice and debt management support to help people take back control of their finances.

The Money Charity
Formerly Credit Action, The Money Charity is a national money education charity aiming to empower people around the UK to make their money go further.

Finder survey: Christmas money worries

I’m planning to cut back this Christmas by...

Response% of responses
Going to cheaper supermarkets36.73%
Putting a cap on what we spend on gifts48.98%
Switching food/drink to cheaper versions26.53%
Having fewer people over16.33%
Taking other measures18.37%
None of these. I’m not planning to cut back this Christmas26.53%
Source: Finder survey by Finder of Finder members, December 2023

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