Our Guide to Managing and Reducing Your Personal Loan Debt

Love Debt Free Personal Loan Debt
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Personal loans allow you to borrow unsecured capital over a fixed term and interest rate – by mid-2019, high street lenders were owed a whopping £35.5 billion in unpaid personal loans. With interest rates that can be lower than many credit cards and overdrafts, personal loans can be an affordable way to help fund personal projects and consolidate other debts.

In 2019, the average APR interest rate on a £5000 was just 8.04% and 3.79% for a £10,000 loan.

Most personal loans are for between £1000 – £15 000, although some lenders may grant loans of up to £25, 000.

There are various ways you can reduce your debt;

  • 0% APR Balance transfer if a credit card
  • Put together a monthly budget to manage your debt
  • Pay more back per month than the monthly minimum
  • Save up and pay off in one lump sum
  • Use the equity in your property to pay off
  • Investigate IVAs
  • Investigate Debt Management plans

Personal Loan Debt: Taking Out a Personal Loan

Before you take out a personal loan, you should be clear on why you need the money and what terms you are signing up for.

If you are borrowing money to consolidate other debt, it is important to make sure that you have your spending under control first. If not, you risk plunging deeper into debt, as the capital from your personal loan will ‘free up’ your maxed-out credit card and other sources of credit. 

Whatever you want your loan for, you will need to consider how long you want to borrow for and how much the interest rate will cost you. The interest rate available to you will depend on your income, credit rating and how much you want to borrow. 

You can take out a personal loan over as many years as you need to repay it. However, you should bear in mind that even though your monthly payments will be smaller if you spread the debt over a long time, you will end up paying much more in interest.

To avoid paying more in interest, pay your loan back in the shortest time you can afford to.

When asked what they thought was the most important factors when taking out a personal loan, here’s what people said:
1 – The interest rate
2 – Cost of monthly repayments
3 – Total amount payable
4 – Duration of agreement
5 – Affordability
People were least likely to consider:
1 – Offers and rewards
2 – Low default fees
3 – Payment Holidays
4 – Introductory discounts
5 – Whether they were likely to be eligible
Source: Statista, June 2018 – Main reasons for taking out personal loans in the United Kingdom (UK) 2017

Personal Loan Debt: I Know I’m Going to Miss a Payment…

Even your careful budgeting before you took out the loan doesn’t alter the fact that circumstances can change.

If you find yourself in a situation where you know that you aren’t going to be able to pay your next installment, you should speak to your lender as soon as possible.

Depending on how soon you contact them, they may be able to move your payment date. If your situation is temporary, some lenders may be willing to waive late fees or even put your account on hold for a short while as you work things out.

If your circumstances have changed in a way that will affect your ability to pay back the loan over the long term- for example, you’ve had a pay cut or lost your job- you should also let your lender know. They may be able to help you spread the loan over a longer term.

Personal Loan Debt: What Happens if I Can’t Pay It Back?

Personal loans are unsecured debt, so you are not at risk of losing your home or other assets if you fall behind on payments.

However, missing installments is likely to damage your credit score and could result in court action against you, which will make borrowing very expensive- or even impossible- for you in the future.

If you have missed a payment, you should make an effort to speak to your lender as soon as possible. Depending on your circumstances, they may be willing to temporarily freeze your account, fees or interest.

If you decide there is no way you can afford to repay the debt, your lender may decide to refer you a debt management agency. You will default on your loan with the lender and the agency will work with you to draw up an affordable payment schedule.

If you miss several payments in a row without contacting our lender, you will receive a default notice in the post. When you default on a loan, your lender will your account and may choose to pass your debt on to a collection agency or take court action against you.

During this period, the lender could also apply extra fees and penalty charges to your debt.

Personal Loan Debt: What Happens if I Default on a Personal Loan?

Debt Collection Agency

There are two ways your lender could work with a debt collection agency. They may enlist the agency’s help in recovering the debt, or they could sell your debt to the agency. In either case, the debt collection agency does not have any special powers.

They can contact you and send you reminders, and may send somebody to your house. However, they do not have the same powers as bailiffs. This means they are not allowed to take anything from your home and must leave if you ask them to. You also do not need to let them in.

A debt collection agency also has the power to take you to court, however this is unlikely to happen if you show that you are willing to make payments- however small.

If you can’t afford to pay back everything the debt collection agency is asking for, you could consider speaking to a debt management agency. A debt management agency, or debt counsellor, will be able to negotiate with the debt collector on your behalf, to find a payment plan which is affordable for you.

County Court Judgment

Your lender or debt collection agency both have the power to try and recover your debt in court. If your creditors decide to take this route, you will receive a claim form in the post from county court with details of the claim on it.

You will have 14 days to respond to the claim, giving details such as your income or your defence against the claim (for example, that it is not valid because the debt has already been paid). Even if you can’t afford to repay the debt, it is important to reply to the claim. This is because the court will take your circumstances into consideration when making a judgment.

 If you don’t reply, you could end up facing an unreasonable judgment- asking you to pay back the whole debt in one go, for example.

Once a debt has been enforced by the court, your lender has the power to send bailiffs to your home, secure the debt against your mortgage, or deduct money straight from your salary or benefits if you don’t pay it back.

How to Pay Off Personal Loan Debt

Once you have taken out a personal loan, you are normally tied in until the end of the term.

Most lenders will let you pay off your loan early if you come into money, although be aware that you could be charged early repayment fees.

0% APR Balance Transfer Credit Card

You could potentially pay off your debt faster by reducing the amount of interest you pay each month. If you have a reasonable credit score, you may qualify for other interest-free borrowing options, such as a 0% APR balance transfer credit card.

This will not only save you money, it can also help you become debt-free sooner. Because you won’t being charged interest on the balance, if you continue to pay it off at the same rate you were doing for your personal loan, you will be able to clear your debt more quickly.  

How Can Love Debt Free Help?

Here at Love Debt Free, we have partnered with some of the UK’s leading Debt help companies.

They have already helped thousands of people reduce and manage their debts, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these debt help companies, click on the below and answer the questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting Love Debt Free.
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