To consolidate or not, that is the question

September 9th, 2008

Television is awash with adverts from debt consolidation companies. They seem to offer a tempting ‘quick-fix’ solution to debt whereby you take out one loan to cover all your existing repayments. However, I advise caution.

Having someone else take the effort away from dealing with all your creditors may sound like a dream, but debt counsellors advise people to steer clear. This is because the interest rates charged on these loans are normally much higher than you can get on the High Street.

In addition the lower monthly repayments are usually achieved by spreading the loan over much longer periods. If the consolidation loan is to help you become debt free this may not be the answer.

Consolidation loans often come with payment protection insurance (the dreaded PPI) with unfair terms, which may not cover you if you are made redundant or fall ill. They are also ‘secured’ loans, which means that if you are unable to keep up repayments you will lose the roof over your head.

If you are sure you want to consolidate your loans into one payment, you should shop around for a competitive rate on the High Street and get a normal unsecured, personal loan.

People in debt should also avoid paying for so-called “debt counselling”. There are plenty of free services available.

A general rule is to pay off your debts, such as your mortgage and credit card, before you start to save money. This is because the amount of savings income you can get is almost always dwarfed by interest rates you pay on your debts.

To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.

You should also factor in tax that you will have to pay on your savings – at 20% for basic-rate and 40% for high-rate taxpayers. At the moment with interest rates at historically low levels, it is probably better to pay off your debts.

Remember, meeting repayments on essential services such as your mortgage and utility bills should be your first concern. If you are paying off a range of credit cards and store cards, you should pay off those with the highest rate of interest first.

You could also switch your balance to a credit card which charges a lower rate of interest – there are many providers of these special “balance transfer” deals. Despite a harsh impression, most companies are sympathetic to people who cannot afford repayments. Recovering debt can be enormously expensive, so they are often willing to work out an agreement with you.

Here are some of the free advice services to help you manage your debts.

The Consumer Credit Counselling Service (0800 1381111),

National Debtline (0808 8084000)

Citizens Advice (www.adviceguide.org for advice or to find local bureau).

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A pincer movement squeezes the car market

September 5th, 2008

Fuel prices are rocketing on the back of high oil prices and credit is hard to come by because of the crunch. With such an irresistible pincer movement can it be any wonder the car market is bleak? However, no one had guessed just how bleak it really is.

Yesterday, the Society of Motor Manufacturers (SMMT) reported an 18.6 per cent annual decline in sales in August, with sales to individuals, rather than to large organisations running fleets of cars, down by an enormous 23.6 per cent.

The spiralling cost of fuel is evident in the effects on the sports car and SUV markets. Corvette, Aston Martin, Bentley and Jeep have all seen sales fall. However, the value-for-money Kia range is in demand, while the Dodges and Cadillacs doing well in the charts are much smaller and cheaper than the traditional notion of an American car.

Sales of Porsche cars, the yuppy badge of honour, are down 26.6 per cent in the year to date, a reflection of declining City bonuses and employment. By contrast, the tiny Smart car has seen its popularity more than double, up 104.6 per cent, with almost 5,000 new examples on the road so far in 2008.

As has been repeated often enough in the media, these are the worst August registration figures since 1966. This figure distorts the truth, however, since August was traditionally the peak month for car sales until the system was changed in 2002. Now it is a relatively quiet month. Yet the trend is firmly down and the picture is of an accelerating decline.

There was some good news for the UK amongst this gloom. Two leading British brands are beating the trend. Boosted by the acclaimed new XF saloon, Jaguar is actually up 12.7 per cent while Land Rover is only down by 15.6 per cent. Mini sales are also down slightly.

The news about the car market came as the Halifax House Price index followed the Nationwide’s into recording double-digit price declines in house prices, and the Bank of England (BoE) resisted calls for relief by leaving interest rates on hold, at 5 per cent.

All in all, the economy looks bleak. The hope now is that the flat growth and lower consumer spending will in the coming months tackle the inflation problem. This will leave the BoE free to cut interest rates and the recovery can begin. Keep your fingers firmly crossed.

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They recognise the problem but what will they do about it?

September 1st, 2008

Iain Duncan Smith, the former leader of the Conservative Party, has released a report into the British debt problem as part of his work on social justice. It presents grim reading.

‘Despite the economic downturn, we are still borrowing more. Total UK personal debt currently stands at £1.44 trillion – an increase of about £160 billion since two years ago. The present government hasn’t helped by getting rid of incentives to save and by raiding the pension funds ten years ago.

This is not just an economic issue: debt can wreck lives. A poll conducted by YouGov for the Centre for Social Justice found that over 40 per cent of British adults think that “serious personal debt” was the biggest social issue facing the UK. The human cost of debt is its effect on people’s self-esteem, their health and their relationships.

Relationship counsellors tell us that it is almost impossible for couples to discuss debt rationally, which creates huge tensions in relationships. In one survey, two out of five couples whose relationships broke down cited debt as a contributing factor. All this is made worse by the accelerating number of house repossessions around the country, estimated now at 123 every day.

Though serious personal debt affects middle and high income families, low income families suffer disproportionately. The same YouGov poll found that just under 40 per cent of respondents living in local authority or housing association accommodation experience serious personal debt, compared with about 20 per cent of the broader population.

Sub-prime lending is an established feature of our deprived communities. It is characterised by high interest rates, often well over 100 per cent on what are essentially short term loans and little or no competition between lenders. In the UK the only bona fide unsecured loans that people on low income can obtain, come from such doorstep lenders.

We know that debt is a cause of family breakdown, and often traps people in benefit dependency. Breakdown Britain called for the government to recognise that there was a big problem building up and urged a major policy change.

To make such a change we will need to expand, support and strengthen UK credit unions: a safe, local community source of credit at reasonable rates of interest to suit low income consumers. Other countries use them extensively; it is only in the UK that credit unions have been stifled. One excellent example of a credit union is run by Leeds City Council.

Furthermore, it is time to teach children about money at school, particularly about what it costs to borrow money. Too many children leave school unable to calculate the simplest of interest rate charges and are easily confused by the seller. We will also need to expand local community based debt advice. Voluntary sector organisations like Christians Against Poverty help families come to terms with their debt and help them plan and save their way back out of debt.

Finally, we will need to encourage Britain to develop a savings culture again. Although much can be done to improve the services offered and the regulations surrounding the credit industry, the heart of the issue is that more people have to be encouraged to save or we risk leaving the country with a debt overhang which will take very many years to clear and deepen the economic downturn.’

As with most politicians it is difficult to tell how much of this concern is real and how much is aimed purely at gathering votes. What is clear is that this report demonstrates the Conservative Party has a much clearer idea of the problem facing the British economy than the Government. Whether or not they will translate this into meaningful action remains to be seen.

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