In The Red

Cynthia and Jane have debt problems and it’s not just their loan or credit card getting out of hand, this is plural. Banks and loan companies are happy to give them credit because somehow they manage meet the regular payments.

Even if it means drawing from one card to pay another they manage. They have steady jobs and between them bring in £2500 through the door each month. After paying bills, food, insurances and debts they are left with a rapidly reducing disposable amount of £700 to cover everything else.

They can see the situation is getting out of hand and feel they’re heading for an accident. The monthly payments are getting bigger and temptation is always there. Credit has always been their first port of call in an emergency, if the boiler went wrong or the car broke down they would use their cards to pay.

Debt list	Outstanding	Monthly
TSB Visa	£1500	£60
Career Loan	£3200	£198
Barclay Loan	£1750	£54
Car Loan	£7200	£357
Barclaycard 1	£2722	£90
RBS Advanta	£4008	£90
Barclaycard 2	£1566	£60
Sub Total	£21946	£909
Mortgage	£42750	£346
Total	£64696	£1255

Who’s responsibility

Banks these days seem to work on the belief that if you’re asking, you must be able to afford it. This is course is not always the case, people do sometimes ask for credit that may not be affordable. If they have paid back loans in the past or have an existing relationship with the bank, credit is likely to be pre-agreed on the computer. 

The idea of a quick answer is designed to make you feel like a valued customer. Our theory is that the application process is designed to not give you time to think.

Ultimate responsibility for repayment obviously falls at the customers door. It is time the banks adopted a more responsible approach to unsecured lending and were not so adverse to saying no!

Analysis

Back to Cynthia and Jane.

One of their salaries is totally taken up by debt repayments every month. The practice of using one facility to repay another is dangerous and should be stopped. They have already taken consolidation loans from the bank and it hasn’t worked. Both recognise that if the debts are to be repaid, then their whole spending culture has to change, with savings put by in case of emergency.

Cynthia and Jane own a flat that is worth £110,000. With only a £42,750 outstanding on the mortgage, they have decided to re mortgage and repay their liabilities in full. This action does have a few draw backs, as the debt will take longer to pay off and more interest payable in the long term. Their financial adviser recommended a deal with their valuation and legal fees paid by the new lender. 

The Result

Credit cards and loans are unsecured debts, therefore interest is charged at anything between 10-20% Apr. Mortgages are secured against property and therefore present less of a risk to the lender. Cynthia and Jane were able to get a mortgage at 5.85% fixed for 5 years and decided to borrow enough to redecorate the flat at the same time. Their new mortgage of £71,200 will cost them £511 per month over 20 years. Saving them £714 per month.

Anybody repaying debts in this fashion should make sure that the monthly saving is worthwhile. You should cut up all of your plastic and replace them with a small credit card for booking tickets. By changing to another card provider you will disassociate yourself from your past. You should set up a standing order to a savings account at the same time to make to build a cash reserve.

Getting advice

If you find yourself sitting on an uncontrollable mountain of debt, don’t be frightened to seek advice. If you’re thinking of re mortgaging then see an independent financial adviser. (preferably gay).

If this sounds a little drastic for your situation, then the consumer credit counselling service 0800 138 1111 or National Debt Line 0808 808 4000 are able to advise on other ways of managing debt. 

Names have been changed.

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