Scotland is struggling with debt
The UK is in the midst of a consumer debt crisis. According to the Office for National Statistics: household debt is 33% higher on average than before the 2008 financial crisis, averaging around £15,500 per household nationwide. Scotland is no exception and has seen a 12% increase in personal debt averages, as well as a 20% increase in small-business failures.
Living with debt has major consequences in terms of living standards, for the individual and the family, and can be a great source of anxiety besides. A big part of this is down to the simple fact that it can be incredibly daunting to try and take action against your debts – with the all-important question, ‘where do I start,’ being particularly hard to answer. This article attempts to offer the reader some clarity, guidance and to help answer that all important question, for debts big and small.
It is crucial to have a plan of action – especially if you are making repayments to multiple creditors. A January 2019 study showed that it would take 26 years on average to write off credit card balances when making the minimum monthly repayment. Paying over a longer period of time of course also means you are likely to be paying more in interest. As such, some good strategy can save you money as well alleviating yourself from the burden of debt much faster.
Budget your way out of trouble with automated banking
First, before choosing the best strategy for you it is key for you to sort out your spending, and your borrowing. At the centre of most debt problems is an overspending problem. Painful as it may be, the first step in solving your personal debt problem is to accurately identify the extent of your monthly overspend. Stop spending are two words which are easy to say and harder to implement.
The most effective way is to automate. How much simpler would saving be if the balance displayed in your current account was purely expendable income? After all, a displayed balance of say £2,000 may be reassuring at the start of the month – but what if only £200 of it was expendable after rent or mortgage payments, utility bills, groceries, car insurance etc?
Fortunately, online resources make this possible. Money Saving Expert’s online budget planner is probably the most effective resource available at the moment.
The MSE planner takes a couple of hours but provides a real assessment as to your overspend – producing both a monthly and annual total. Finally, to ensure you stay within the limit in practice, highly recommended is the ‘piggybanking technique.’ The key steps are as follows:
- Step 1: Define the main areas you need to make savings in and set a new ideal monthly spend in that area (the budget planner can help you do this.)
- Step 2: Set up a new bank account for each. Besides your main current account, always have a bills account and if you are self-employed a tax account. Then select 3 or 4 of the main categories from Step 1 for the other accounts.
- Step 3: Set up standing orders from your main current account into each of these accounts. Schedule this for 2-3 days after payday if there is any chance of payment issues from your employer (or clients if you are self-employed.)
- Now your main current account will accurately show what you have to spend. Piggybanking is most effective when you use online banking – access to your current account balance on your phone allows you to continually check on it in real time, and aid your decision making in day-to-day life.
If you need a loan, check all the options
Next, sorting out your borrowing involves more than ‘just stopping.’ Sensible borrowing and affordable credit are vital tools in debt reduction. Payday loan firms rely on the perception that besides bank loans there exists no alternative. Whether you have an unforeseen bill or change in circumstances, payday loans are not the only means to keep your head above water in the short-term. Many can’t get a good rate for a personal loan from banks by account of their poor credit rating.
If this applies to you, a better alternative to high-cost payday loans could be a local credit union. Credit unions provide low-interest loans for members who share a ‘common bond:’ typically residence in a local area; or employment in an industry.
In preparation for this article, we used lenders own loan calculators to obtain a quote for a £500 loan. Quickquid offered a maximum repayment schedule of 3 months with an APR of 1294.1%. Therefore, the total interest on a £500 loan was £360. The total repayment was £860. For comparison we chose a credit union local to our office – Glasgow Credit Union, the biggest community lender in the UK. Their website states that: “Everyone who lives or works in the ‘G’ postcode area can become a member of Glasgow Credit Union and access our exclusive savings, loans and mortgages products.” Using their loan calculator, we got a quote for a £500 loan as above. The loan was repayable over 12 months, and APR stood at just 24.9%. Therefore, the total interest on a £500 loan was £62.92. The total repayment was £562.92. In this instance, a potential borrower could save £297 on just one loan.
Another suggestion is to shift your credit card balances to 0% interest through a ‘balance transfer.’ This is a technique whereby you shift your debt to a new credit card, making the most of balance transfer deals. A comprehensive guide is available here.
How to clear your debts like a pro without a loan
Now, consider two popular repayment strategies. First, ‘debt avalanche.’ This method breaks down as follows:
- Step 1: Make a list of all your debt and rank them by interest rate from highest to lowest.
- Step 2: While making the minimum repayments on all of your debts, allocate the remaining affordable amount to the highest-ranking debt.
- Step 3: Once you have written off the debt at the of the list, repeat this process going down your list.
‘Debt snowballing’ essentially reverses this process in key ways:
- Step 1: Make the minimum repayments for all debts.
- Step 2: Allocate all of the remaining affordable amount towards the smallest outstanding balance.
- Step 3: Once you have written off the smallest debt, repeat the process going up your list.
Both of these methods have their merits. Debt stacking generally saves you the most money in interest, but it might take a long time to get a high-balance debt off your list. Debt snowballing may see you pay more total interest, but the psychological effect of ‘small wins’ may well keep you more motivated. So as to which method to choose, it may be best to borrow from fitness terminology: “the best diet is the one you stick to.”
Poor credit and can’t afford pay your debts in full?
Don’t worry you’re not out of options yet, there is government legislation designed to help in these situations.
One of the formal, statutory solutions in Scotland is the Protected Trust Deed, a specialist insolvency solution..
The Trust Deed is a binding agreement between you and your creditors, overseen and administered by an Insolvency Practitioner (IP.)
The Trust Deed allows you to repay your debts in a single, reduced monthly payment distributed too creditors by your IP. Below is a transparent, brief overview of advantages and disadvantages, as well as notes on eligibility:
- Your repayments are combined into one monthly contribution, which is managed for you – allowing you to put your debt problem behind you.
- This contribution is based on what you can actually afford
- Your creditors cannot legally contact you, all communication is to be directed towards your IP.
- Your debt is ‘frozen’ throughout the agreement – meaning no fees or interest increases can be added to the debts in the Trust Deed.
- At the end of your agreement (typically 4 years) the rest of your debt is written off.
- Your credit rating could be affected: Trust Deeds stay on records for 6 years.
- You may be required to release equity in your property.
- You cannot be a Director of a Limited Company
- You typically cannot acquire credit of over £250 during the Trust Deed.
- Who Qualifies for a Trust Deed:
- People who have been living in Scotland for over 6 months with debt of unsecured £5,000 or more, owed to 2 or more creditors;
- Unsecured debts include but are not limited to: unsecured bank loans; payday loans; overdrafts; store cards; council tax arrears & tax bills (for those self-employed.)
- You must be employed or self-employed, as your contribution is calculated from surplus income.
The Protected Trust Deed and DAS are our specialist services and have offered thousands of Scottish families and individuals a financial fresh-start in the midst of a consumer debt crisis throughout the UK.
For a detailed, free consultation with one of our expert advisers, get in touch today on 0141 221 0999 or leave an enquiry online or on our Facebook page today.