Types And Forms Of Debt
Types Of Debt
It all started innocently enough for David. While in college, he had to apply for a student loan, to help him with his school cost and books. Then he up his game when they told him he was qualified enough for a credit card.He initially began with small minimum payments. He realized he could easily maintain the monthly minimum payments and this gave him more confidence to ask for more. By the time David was graduating, he had well over 70,000Euros in debt, inclusive of his student loan and credit card debt He decided to turn his financial life around in 2006 when he struggled just making the minimum payments. Like many others, he thought he was doing fine because he was making his payments and his credit score was great.
With good advice and some self-discipline. David was able to catch up on his debt within 3 years. It wasn’t easy though, he had to cut out his expenses, get a share-house and work two-part time jobs.
If used correctly, Debt can be a good thing. Sometimes it’s really necessary for that next step in life, be it a career advancement course, getting that dream house or buying that family car.The key to all of this management and self-discipline to pay back what you owe. Dealing with money issues can sometimes be off-putting, but if you don’t understand how things like credit or mortgages work, you could end up losing out financially or getting yourself deep in deb
It’s only when debt repayments become unmanageable or unaffordable that debt becomes a problem.
There are many ways debts can suddenly become unmanageable, for example:
- Unemployment or underemployment
- Illness leading to loss of work
- Unexpected new costs such as essential home repairs
Forms of debt
Although there are really only two types of debt, secured and unsecured, these can come in many forms.
• Secured debts
A secured loan is a money you borrow that is secured against an asset you own, usually your home. Borrowing money against an asset to pay off debts can be risky and not an ideal way to pay off your debts. Your home or property may be repossessed if you fail to pay the loan. They can also take other debt recovery action too, which may damage your credit score. They come with a lower interest rate because banks face a lower risk when collateral is pledged. This is long-term financing, with repayment terms of 15, 20, or 35 years.
They may include home mortgages, vehicles loans, log books loans, savings loans, title loans and pawn broker’s loans.
• Home Mortgages
Buying a home is the largest purchase you’re likely to make. A mortgage is a loan taken out with a bank or building society to buy a house or other property. The mortgage is usually for a long period, typically up to 25 years, and you pay it back by monthly installments
• Log-Book loans
Put simply, a logbook loan is a loan that is secured on a vehicle – this could be a car, van, motorcycle, or just about any other privately-owned vehicle. You simply hand over your vehicles ownership certificate, Receive the intended loan, continue using your vehicle as you are servicing your loans, and when you’re done paying back the loan, your logbook is returned and cleared.
The major con against log-book loans is that they are usually very expensive with expensive interest’s rate, which can be as high as 450%.They are usually discouraged due to this, and the high risks associated with them, And used only as the last resort, by people with no other finance options.
• Pawn broker loans
A pawnbroker is someone who lends money according to the value of goods left with them (pledged). When you leave your goods with the pawnbroker they must give you a receipt known as a ticket.
Usually the pawn broker retains your valuables for a period of six months, in which during the period, you are slowly re-paying your loan.in the event you are able to repay the loan sooner, the pawn-broker is obliged to return your assets sooner. The period can be extended by paying the interest only and re-pledging the goods.
An unsecured loan is a loan whereby you agree to make regular repayments to the lender until the loan, as well as all interest, is fully repaid. Non-payment of the loan can result in further fees and possibly court proceedings
Because the loan isn’t secured on your home, the interest rates tend to be higher.
If you don’t make the payments, you might incur additional charges. This could damage your credit rating.
Also, the lender can go to court to try and get their money back.
Common unsecured debts include;
Catalogues, Personal loans, over drafts, payday loans, store cards, income tax arrears, utility bill arrears and credit cards
A bank, building society or finance company can give you a personal loan whether or not you’re a customer.
Some personal loans have variable interest rates, meaning they can go up or down.
If you’re only just able to afford the initial repayments you should avoid this type of loan in case they do go up. You should also be wary of any arrangement fees and if they are, include it on the total amount of the loan.
There are different forms of personal loans, which may include:
• Home credit (doorstep loans)
It simply works, when an agent who MUST be invited by you, comes to your home and explains everything you need to know about your loan, and finalizes the paperwork, in your house. The agent is usually from your own locality, and most likely will be the one you would be dealing with, during your whole loan servicing period or if you have any queries concerning your loan. This Agent will also come to your door once a week to collect the loan repayments and also be available if you have any queries or concerns. The loans are usually for smaller amounts and you will be charged a high rate of interest for borrowing in this way. It’s also worth to note that they have a much higher interest rate than a bank loan or a credit card.
• Payday loans
a payday loan is an amount of money lent to an individual with an expectation it will be paid back, with interest, soon after receiving it.tthey are usually lent with with the agreement that they will be paid back within a period of time that can range between a few days to several months.
Normally you have until payday to pay back your loan plus interest, although some payday lenders let you choose the repayment period.
A payday loan is expensive and could make your situation worse if you can’t afford to pay it back on time. You need to think carefully before choosing one.
If you decide to get a payday loan, shop around and compare the interest and charges before you borrow. Make sure you are clear about what will happen if you can’t pay it back.
• Student loans
As a student you can apply for tuition fee and maintenance loans to pay for course fees and living costs. Repayments are only required when you start work and earn more than a threshold figure. there are more ways to reduce your student loans than other types of debt—including a public service forgiveness loan and volunteering in exchange for student loan repayment.
What financial help you can get depends on the course you study, where you live while you are studying and your individual circumstances
For that career advancement ,you may get a Career Development Loans which can be provided by some banks and are for people who want to follow a course of study but don’t have the money to pay for it.
• Credit card
Simply put, this is the most common type of credit in the UK,As per the data released on January 2018 the average credit card debt in the UK has reached more than £70bn, this works out as £2,568 per household! This partly is contributed by their ease and convenience of using them.ie swapping for transaction is much simpler than lining for a bank loans Credit cards can be obtained from banks, finance companies, huge market chains and store chains.it should be stressed, that credit cards are forms of borrowing and are only handed over after an application. You also can only spend up to your credit limit, and if you make your payments on time, then there will be no interests rate changed. The amount of interest varies between providers so shop around for the best deal. Its only when you go over the credit limit that the lender may charge you a fee and some will also charge an annual fee.
• Credit union loans
Credit unions are community savings and loan cooperatives, where members pool their savings to lend to one another and help to run the credit union. Usually members from a credit union usually have something in common such as; they may be living or working in the same area/company, or maybe members from the same trade union, church or association. Most of their loan will last around five to ten years, and since they are a no-profit business, they tend to be cheap with less interest rate than banks.in most cases, you will realize that credit unions loans are much cheaper than home credit.
• Loan sharks
Loan sharks are illegal lenders who often target low income and people in dire situations. They are usually arrange the loans in makeshifts locations, as they don’t have an office, their rates are ridiculously high and they don’t require any paper works, if any from you, to either confirm or for future references your agreement with him. A loan shark usually has lots of customers and lends money like a business, but their lending is illegal. Loan sharks often take other illegal action to collect the money they’ve lent you, such as threatening violence or taking away your credit cards or valuables. In extreme cases, they’ve been known to force non-payers into prostitution and drug dealing.
An overdraft is an agreement between yourself and your bank that allows you to spend an agreed upon amount of money more than you currently have in your account. Simply put, it’s a type of loan linked to your bank account.
You might request one from your bank or your account might automatically offer you an overdraft with your agreement. Overdrafts often have a high level of interest placed upon them and also there is often a small charge to use your overdraft or a large charge if you haven’t pre-agreed to the overdraft with your bank.
• Store cards
Store cards offer clients credit up to an agreed limit but the interest rate on these cards is usually high compared with other forms of credit, including credit cards.
If you cannot afford to pay your store card by the due date, you can contact the store card lender (using the details that appear on your statement), explain your circumstances, and request a hardship variation.
• Income tax and Arrears
Her Majesty’s Revenue and Customs (HMRC) handle debts that relate to Income Tax, National Insurance, VAT arrears and tax credit overpayments. If still have any arrears on these, it’s of outmost importance that your clear them as possible.
The urgency is because these are considered ‘priority debts’, meaning the consequences of not paying them are serious and include court action, bailiffs – and in some extreme cases, even imprisonment.
When you have a figure that you can afford to pay each month, you should speak to HMRC to discuss setting up a regular payment plan.
To speak to HMRC you can call 0300 200 3300. Don’t worry if you work long hours – during the week their lines are open between 8am and 8pm – and between 8am and 4pm on Saturdays.
• Business debt
If you are self-employed, any money your business owes is known as a business debt. Business debt is often necessary to cover startup costs such as equipment and office space. The end goal is usually that, as your business starts to operates and revenues start streaming in, then money earned will be sufficient early on to service the debt, but it’s not always this simple.
Along with secured debts, there are some other special debts that we cannot help people with, and the payment of which must be prioritised above others. These include;
HP agreements- Hire purchase (HP) is a type of borrowing. It is different from other types of borrowing because you don’t own the goods until you have paid in full.While making the HP payments, you are not allowed to dispose, or alter the goods in any way. If you fall behind the payments, the lender may be able to repossess the good or asset
Court fines- If you’ve been given a magistrates’ court fine it’s important you pay it. If you don’t, the court can: deduct the fines from your monthly income or benefits. If not possible, the court could send a bailiff at your home or property to collect what is owned(the bailiffs service fee will be added to the initial fine) and/or the court could register the fine on your credit history for five years, this can hinder you from getting any credit in future.
TV license arrears- It’s a criminal offence to watch live TV or use BBC I Player unless you have a valid TV license. Without one you risk prosecution and can be issued a fine of up to £1,000, plus court costs. You still need a license even if you don’t own a television and only watch BBC I Player on a phone, tablet or computer.
Council tax arrears- council tax arrears are considered as priority bills,ie government-owned loans. There are usually serious drawbacks if you default on your bills. Usually if your 14 days late, they will first send you a remainder on your mail If you make the payment within seven days of the reminder letter you can continue paying your council tax in instalments. But if you don’t make the payment within the seven days, your local authority can ask you to pay the whole council tax for the rest of the year. You have another seven days to pay the whole amount, and then the local authority can take you to court
Child support arrears- You pay child maintenance, the official name for “child support”, to help with your child’s everyday living costs, like food and clothes. If you don’t pay the consequences can be severe. The Child Support Agency (CSA) or Child Maintenance Service (CMS) have the powers to deduct arrears and ongoing payments straight from your earnings or bank account. They have a wide range of other legal powers and as a last resort you can be imprisoned if you refuse to pay.