A sudden, steep but highly anticipated recession means we are all desperate to raise money over and over again and whatever we do, we need to pay off that debt as quickly as possible to strengthen our finances for turbulent times ahead. .
For the most part, this is absolutely correct advice. But not always.
Those with serious debt problems should seek advice from charities such as StepChange, which can develop personal plans for amortization or debt relief.
But if you haven’t and managed to manage your bankroll with unexpected cash in Covid, or if the crisis has left you in annoying but largely manageable levels of debt, here are a few strategies you can use.
Repayments: credit cards and overdrafts
We’ve always known credit cards are an expensive way to borrow money, but now, with the new reverse overdraft fee rules that generate a typical interest rate of 40%, overdrafts in particular are very expensive, although they don’t always realize it.
You’re right to pay it off as quickly as possible, and of course that applies to business cards, thresholds, or payroll loans – the most expensive form of mass loan out there.
Although the “snowball” method of paying off the smallest debt for the first time is gaining popularity with its psychological surge, experts urge debtors to focus on paying off the most expensive debt first. This is likely your overdraft. Clean it up and consider canceling setup if possible. It’s not worth it.
With a 0% reduction on old credit card balance transfer transactions, the days back and forth between free credit transactions without ever being paid back are fast fading away.
Millions of people take vacations to pay off debts. What happens when you finish?
Start by putting the balances on all of your cards below half of the total available balance to reduce the impact on your credit score. Then pay it off quickly and firmly.
Maybe you’ll pay it off: mortgage and personal loans
Long-term loans with lower interest rates sometimes don’t even feel like debt, they just sit in our brains under a file called an “Account”, as if we need something constant in life that we can’t escape.
However, paying a few pounds a month on a mortgage or loan can significantly shorten the term and thus the amount of interest you end up paying. But there is a warning.
First, these products often have an early settlement fee (ERC). Mortgages, in particular, are often a burden if you pay more than 10 percent of the amount you owe over a certain period or in the first few years.
Car loans often impose similar fines depending on the type of funding you have arranged to finance. A fixed rate may be required to pay off car financing and may be covered if early settlement is possible.
Second, as soon as you return the money, they leave. So, if you find yourself in the midst of a corrosive economic pandemic, for example, and you need extra cash to filter you out, this is not a flexible product to return some money even if you are a model borrower. By now, you are probably already exercising your vacation options.
Set up an emergency fund of between three and six months for your usual living expenses before embarking on an overpayment journey.
Another question that arises is whether paying off long-term debt at a low interest rate is the best way to use your money. Horrible cash savings today, even with fixed rate offers that block your money for several years, may not be able to pay you back more interest than you saved on a loan.
On the other hand, investing money can outperform our current very low interest rates, especially with such a long investment horizon. Getting the advice of an independent financial advisor is certainly something, although some investment vehicles have ridiculous management fees given today’s volatile stock market.
Don’t pay: student loans
Around 130,000 UK-based alumni made additional voluntary payments worth £ 2,740 each in 2019/20. Another 10,600 returned for an average of £ 4,310 before going into debt.
But it might be a useless exercise.
Student loan companies have been accused of promoting unnecessary payments
Students, starting university this year and receiving full tuition fees and maintenance loans, could owe more than £ 61,500 on departure, Hargreaves Lansdowne estimates. To get it back in full, they will need a salary of £ 53,100 – provided they don’t take career leave or get a raise.
Coming back to the real world, the average annual payout is now under £ 1,000 a year – just £ 120 in the last decade.
Unsurprisingly, the Institute for Tax Research (IFS) found that only 17 percent of graduates will complete their loan in full.
“It’s very worrying to send your kids to college to run into tens of thousands of pounds in debt – and nobody likes the idea that most of it will pay off in their fifties,” said Sarah Coles, a personal finance analyst at Hargreaves. Lansdown.
“However, if we focus on official student loans, we might lose money – and ignore the really problematic commitments students accumulate along the way.
“Most graduates will only pay back their student loans after they are written off. However, many are so worried about taking on debt that they make additional payments.
“For some, this would be a sensible approach based on careful calculation, but for many there is a real risk that this additional payment will be a waste of money,” he warned.
“During their studies, they’ll borrow thousands of pounds which can be returned to bite off.”