When taking out a mortgage, applying for a loan or choosing the right savings account, confusing jargon is an unfortunate fact of life when it comes to almost any financial product or service.
A study by Which?, the UK’s consumer association, found that only 1 in 10 people read the terms and conditions carefully when opening their bank account. This is hardly a surprise, considering that Nationwide accounts offer the ‘most concise’ T&C’s at over 7,500 words in the small print.
Debt advice, too often, falls into the same trap of using confusing terms. Industry jargon can make the crucial first steps to tackling your debt problem appear even more daunting, discouraging many people from taking action.
At Trust Deed Scotland we know that dealing with debt can be stressful and we want to make it as easy as possible for people to tackle the problem. This guide will explain in plain English the meaning of some of the key terms you are likely to encounter throughout your journey in reducing your personal debt. Our specialist service at Trust Deed Scotland is the Protected Trust Deed, and the guide will place special emphasis on the terms you are most likely to come across in your free consultations with our expert team.
Creditors & Debtors
A ‘creditor’ is someone you owe money to and you become a ‘debtor’ when you owe someone money. For example, if you have an outstanding bank loan of £1,000, the bank is your creditor and you are their debtor.
In consultation with our team, one of the first questions we will ask is how many creditors you have – in other words, how many people or companies do you owe money to?
A ‘Trustee’ is a very broad term in accounting. In the context of a Trust Deed, a Licensed Insolvency Practioner (IP) will become your Trustee – the person who will take control of your case for you once the Trust Deed is signed. They handle all administrative work and any communication from creditors (letters, phone calls etc) will be sent to them instead of you.
A Guarantor is someone (often a family member or friend) who agrees to pay a debt on someone else’s behalf. When a landlord or loan provider asks you to provide one, this is essentially what they are looking for as a way of ensuring they will be paid/repaid.
Bailiffs (sometimes called ‘enforcement agents’) are legal officials who can in certain circumstances enter your home and seize belongings to contribute towards your debt. In the UK, this is often the last resort. It may, however, be worth seeking guidance on your rights and Bailiff powers in the UK, a basic guide is available on the Citizens Advice website.
Secured & Unsecured Debt
The distinction between secured and unsecured debt or loans is very important in terms of a Trust Deed. Basically, secured debt is money borrowed that is attached to an asset. The best example is a mortgage on your home. If you fail to make the payments, your creditor could move to take ownership of the home. Unsecured debts are not tied to any asset.
As a basic rule: secured debts cannot be included in a Trust Deed, while unsecured debts can. Our advisers will ask what your unsecured debts are. A Trust Deed can include most unsecured debts, including:
- Unsecured Loans
- Credit Cards
- Council Tax arrears
- Payday Loans
- Store Cards
- Credit Unions
- Previous Mortgage (shortfall)
- Previous Car HP (shortfall)
- HMRC Bills (self-employed)
- Child maintenance arrears
If you’re a homeowner, equity is the difference between what your home is worth in market value today and the amount you have left to pay on your mortgage loan.
For example: if your home is valued at £200,000, and you have £150,000 to pay on your mortgage – you would have equity of £50,000.
Your credit rating indicates to your lenders how likely you are to repay your debts based on your credit history. It’s what a lender uses to decide whether or not to lend you money. A poor credit rating may see a lender more reluctant to provide you with a loan. Your credit rating is based on how your credit history and how well you’ve demonstrated that you can repay debts. Credit ratings are often misunderstood, we recently debunked 9 stubborn credit score misconceptions.
Debt consolidation is where you combine your existing debts, borrowing money to repay all or most of them. This leaves you with the same outstanding debt, but to a single creditor as opposed to multiple. With the right strategy, this can reduce the total interest or monthly totals you have to repay.
Priority debts often have serious consequences when you fail to make payments. Including, for example, the loss of your home in the case of a mortgage loan. In other instances, they can lead to imprisonment. Non-priority debts, on the other hand, have less serious immediate consequences. It is therefore important to know what your priority debts are, a full guide is available here.
This is the money you have available to spend after paying all main living expenses, such as utility bills or rent. In the context of a trust deed, our advisers will need to figure out how much disposable income you have each, to determine what your new monthly payment will be.
An arrear is simply a missed payment, normally stated as how many months behind on payments you are.
This is a document sent from a creditor when a borrower breaks the terms of an agreement with them (most commonly, by failing to make repayments.) A typical default notice will state that they intend to reclaim the sum owed; how they intend to do so (normally through court proceedings;) and how you can fix the situation within a certain time limit (normally by paying back the debt with additional charges.)
A Hire Purchase (HP) sees a customer pay for something in instalments, and not own it until after all payments have been made. The most common example is a car, though it can be many other things.
The Annual Percentage Rate (APR) allows customers to compare interest rates from different lenders. APR adds the interest rates of a loan with any other charges or fees (like administration fees.) Therefore, the lower the APR on a loan, the cheaper it is in terms of repayment.
Compound interest is essentially interest on interest. It takes 25 years to pay off the average credit card if you make only the minimum monthly repayment. So, for example, assume you borrowed £1000 with an interest rate of 15% over 20 years. Without making any repayments, your bill would amass to £16,400.
If a loan contains a variable rate, this means that your lender can increase or decrease the interest rate at will.
Hopefully, this guide has offered clarity on some confusing terms which you will need to familiarise with on your journey towards becoming debt-free.
If you find yourself in an unmanageable situation and are ready to get started, we can help. We are FCA approved and our expert team has helped over 16,000 people press the reset button on their personal finances with a Protected Trust Deed.
For an accurate assessment of whether a Protected Trust Deed is the right option for you, get in touch for a free, confidential consultation with the team on 0141 221 0999 or see if you qualify in 60 seconds.