Entries Tagged 'debt' ↓

The credit crunch refers to a sudden shortage of funds for lending, leading to a resulting decline in loans available.

A Credit Crunch can occur for various reasons:

• Sudden increase in interest rates (e.g. in 1992, UK government increased rates to 15)
• Direct money controls by the government (rarely used by Western Government’s these days)
• A Drying up of funds in the capital markets

The recent credit crunch was driven by a sharp rise in defaults on subprime mortgages. These mortgages were mainly in America but the resulting shortage of funds spread throughout the rest of the world.

Steps to Credit Crunch

1. US mortgage lenders sell many inappropriate mortgages to customers with low income and poor credit. It is hoped with a booming housing market, the mortgages will remain affordable.
2. Often there were lax contols in the sale of mortgage products. Mortgage brokers got paid for selling a mortgage, so there was an incentive to sell mortgages even if they were too expensive.
3. To sell more profitable subprime mortgages, mortgage companies bundled the debt into consolidation packages and sold the debt on to other finance companies. In other words, mortgage companies borrowed to be able to lend mortgages. The lending was not financed out of saving accounts, for example.
4. Many of these mortgages had an introductory period of 1-2 years of very low interest rates. At the end of this period, interest rates increased. Continue reading →

Unnecessary debts can cause serious financial problems and needlessly create uncertainties in the economy.

Ways to avoid unnecessary debts:

Keep a track of Your Spending.

If you have a habit of purchasing too much on credit and store cards, do without them for a while. Credit cards can be a very easy way to spend more than we have. Because we are using plastic, it is easier to avoid working out whether we can actually afford it. Sometimes, with credit cards, it can even feel like we are not parting with any money. However, with cash it feels much more painful to part with the cash.
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If you are facing a mountain of debt, there are several things that you can do to try and reduce your debt problems

Don’t Panic.

Do you remember why the Hitch Hiker’s Guide to the Galaxy is the most popular book in the galaxy - because it has the reassuring words ‘Don’t panic’ written in bold letters on the front. Whatever your financial situation don’t let the problem of debt dominate your life. There are several options which will enable you to work through your financial situations.

Understand Your Situation

It is important not to sweep all your debts and bill reminders under the carpet hoping they will dissappear. Keep track of every bill, debt and overdraft and work out which is the most pressing to reduce first.

Optimise Your Debt.

Debt is not good, but some debt is more expensive to service than others. Prioritise your debt and seek to reduce the most costly debt first. If you are paying credit card debt at greater than 15% this is a very expensive way of borrowing. Seek to reduce the the most costly debt first. If possible you can consolidate debt into the lowest interest paying account. If you consolidate your debt against the value of your house, be aware that you may put your home at risk. Nevertheless you may see your interest fall from 17% to 5%. This can be very helpful, if you use the smaller interest payments to reduce your debt capital.
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There is an interesting documentary on ITV tonight about some of Britain’s worst cases of debt. The programme entitled Repossession, Repossession, Repossession is likely to make grim viewing, but does highlight some of the reason for Britain’s growing levels of debt (a phenomena which is also occuring in the US)

According to a survey by KPMG, 22pc of Britons are struggling to repay their debts and 35pc fear that 2008 will become even more difficult to make ends meet.

Reasons for Britain’s debt Crisis.

• Individual Attitude to Debt and Spending. We live in a society where people increasingly seek instant gratification through material goods. The notion of saving and being cautious is less popular than ever.
• Ease of Credit. Even as one family where getting evicted from their house (they borrowed too much) they were still being offered easy credit. Although people have to take responsibility for their own financial situation. It doesn’t help that financial institutions often target people with bad credit histories and poor financial education.

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At university I took out the maximum student loan and put the money in a post office savings account. I made about 1% profit between the interest charged by the student loan company and the rate paid by the post office. I never used the money as a student, although it came in handy a few years later when I needed to put down a deposit for a house. This hardly counts as debt, although 10 years later I’m still paying off the student loan.

Buying a House.

Buying a house really strained my personal finances because I really needed to stretch myself to buy a house. I bought a house for £185,000 of which I needed to put down a deposit of £45,000. This included £7,000 of my own money (including student loan I had saved) and a £38,000 loan from my parents. Furthermore the interest payments on my mortgage were a bit higher than the cost of renting. The mortgage was for £140,000, over 6 times my annual income. I put all my savings into buying a house, but then found I needed to buy quite a few goods to actually go into the house. This caused by credit card debt to increase from £0, to £3,000 in a short space of time. For the past 4 years, I have successfully moved this £3-4,000 credit card debt from one 0% credit card company to another. Often I would have to pay a 2% balance transfer. But, effectively it is a very cheap way of borrowing money. The trick to maintaining all this credit card debt at 0% is to protect your credit rating and not to get greedy. e.g. Don’t borrow on a credit card just to put it in a bank. The 1-2% interest profit is not worth it. Another tip is to not cancel credit cards. Often old credit cards are willing to take back the debt at 0%.

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These suggestions may be an indicator for whether you are entitled to a refund, or at least partial refund. It is helpful if you can have to hand a copy of the initial agreement. If it has been lost, ask your bank for another, dated from when you took it out.

This is a template of a letter that can be used to claim a refund 

These suggestions may also be relevant for other financial services.

Mis Selling Loan Insurance

1. Not told all details.

Were you told about exemptions and small print? Some of these small print may be important for your case. For example, would your long term illness be included in an insurance payout? Probably not.

2. Were You told the full cost?

Sometimes you may have been sold a monthly figure of £10 a month. But, were you told the final cost? E.g. some loan insurance protection can cost upto £3,000 for a £7,500 loan

3. Does Your Company have a record for Misselling?

If your company has been fined by the FSA for misselling loans then it is likely that your case is stronger. If it has already been proved that the company has missold to others it is likely it has missold to you. The FSA has already fined HFC and Capital One Bank Continue reading →

Next time you take out a loan, think very carefully before buying the extra insurance. PPI (Payment protection Insurance) for loans has become a very profitable way for banks to make extra money on selling loans. It is estimated that only 20% of money collected in the scheme is returned to consumers, leaving banks with an 80% profit. The magazine Which have criticised this for being ’shockingly high’. Many customers are taking steps to claim back money. There is a template for getting a refund from banks here

Cost of PPI

The cost of PPI can add upto £3,000 for a £7,500 loan. It effectively doubles the interest rate making a personal loan more expensive than borrowing on a credit card.

Misselling of PPI

Furthermore, it is argued that the industry is guilty of misselling PPI. There are often many exemptions (e.g. if you are self employed, disabled, if you had a medical condition you did not explain e.t.c) which make it difficult to make a claim on a loan. Many consumers do not realise that Loan insurance is optional and not necessary.

HFC a subsidiary of HSBC has been fined a record £1.1 million by the Financial Services Authority for selling loan insurance to the sub prime market without proper explanation of the many exemptions and small print.

Margaret Cole of the FSA said:

“The fine against HFC – the biggest PPI fine to date and first since our September announcement – is evidence of our determination in this area,”

HFC is not the only firm to get fined, other firms include Capital One Bank. It is also likely that other big financial banks like Halifax, Lloyds, Natwest, and Abbey National will come under increased scrutiny

Complaining about Misselling of Loan Insurance

If you have bought loan insurance (PPI) and feel that you were not explained its full cost and also the many exemptions that apply, it is worth complaining to your bank and if necessary raising it with financial authorities. It is fine to write a simple letter saying that you would like a refund because the product was mis sold contrary to FSA regulations. There will be many banks wanting to avoid the large fine of HSBC and also the bad publicity that goes with it.

• Complain to the Financial Ombudsman - for the misselling of any financial product
• Bank’s £4 billion protection racket at Independent

One of the big advantages of being a homeowner is the option to consolidate higher interest paying debt into your mortgage.

The basic advantage of consolidating debt into a mortgage is that you can move your debt to the lowest interest paying type of loan.

For example, if are paying interest on store cards or credit cards your interest rate may vary between 15% and 31%. At these levels of interest it can be very difficult to pay off your debts because so much goes on keeping up with the interest charges.

If you have a standard mortgage you will probably be paying between 5% and 6%. Therefore moving your debt to your mortgage has a clear advantage and will save considerably in the medium term.

How To Consolidate Debt into a Mortgage

To consolidate debt into a mortgage you will need to remortgage and get a bigger value for your initial mortgage. If your initial mortgage was for £140,000 and you remortgage for £150,000 you can use the extra £10,000 to pay off your other debts. Continue reading →

Consolidating debt, means that you bring together different loans and debts and place them in one or two specific accounts. This makes it easier to manage. Also consolidating debt often enables a lower interest rate to be gained.

What is the best way to go about consolidating debt?

 1. Work out Where your Debts are.

The first thing is to write a list of all your various debts. This includes, mortgages, secured loans, unsecured bank loans, credit card debts, store card debts. private debts, outstanding payments.

Next to each debt write down the amount of debt, the interest rate, the time period and the monthly repayment.

You may get something like this

• Mortgage £100,000 - 6% - £600 per month for 30 years
• Credit card £10,000 - 16% £200 per month (minimum) until you pay it off
• Bank loan £5,000 - 8% £300 per month for 2 years
• Store Card £500 - 25% £70 per month until you pay it off.

2. Use Savings

The next thing to do is to work out if you have any savings you can use to pay off your debt. Of course, it is good to have savings and a  ‘nest egg’ but there is no point in gaining interest of 4% a year, when you are paying interest at 24%

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In order to get out of debt there are various steps that we need to look at. There is no magic cure or special product, it requires a careful look at our financial state and making practical changes to improve our situation. The important thing is to be willing to take bold and radical changes in both your thinking and financial planning.

1. Take stock of your situation.

To get out of debt, we first need to be able to know all our accounts and borrowings. When in debt, there is a tendency to try and bury our head in the sand and avoid facing the gravity of the situation. However, we need to know our current financial state to be able to solve it.

2. Take Bold Steps

If you are paying high interest payments, it becomes increasingly difficult to get out of debt. If you are only meeting the minimum monthly repayments you are likely to really struggle to ever pay the debt off. Therefore, you need to make big changes and not just reduce the odd extravagance. This could include the following.

3. Get Another Job.

If you get a second job at the weekend or evening, you can put all your earnings into paying off the debt. Although this seems drastic, in the long run it could save you a lot of time and effort. Because as you pay off the debt and no longer have to pay interest payment you will effectively increase your earnings in the future without working.

4. Sell the Car.

People often feel a car is indispensable, however, life used to function quite well before the invention of a car. Car’s have many hidden costs, repairs, insurance, tax. People usually underestimate the cost of having a car. Thus, living without a car, has many financial advantages, you will definitely save money. You may even get very fit, cycling to work instead.

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