Surviving a “squeeze on real take-home pay”

25 June 2008

In millions of UK households, every penny is already accounted for: from food and petrol to utility bills and debt repayments, it’s as good as spent before it’s even earned.

So when Mervyn King, Governor of the Bank of England, tells us we’re facing a “squeeze on real take-home pay” – and we hear that the cost of gas and electricity could rise by up to 40 per cent this winter – finding a way to reduce monthly costs is absolutely vital.

Debt consolidation loan
For people with multiple debts, one solution might be a debt consolidation loan – basically, a new loan that pays off all your other unsecured debts. Consolidating your debts gives you a chance to re-think how much you can really afford every month. You can arrange to repay the debt consolidation loan over a longer period of time, as this will reduce your monthly payments (although it may mean you pay more in total).

There’s also a good chance you could get a debt consolidation loan with a lower interest rate than your current debts, especially if you’re paying off high-interest debts like credit cards, store cards and overdrafts. In general, the more reliably you’ve been paying off those other debts, the more likely you’ll be to have a good credit record, which should help you find a debt consolidation loan with a good interest rate.

However, a debt consolidation loan isn’t right for everyone. Depending on your situation, you might be better off with a different debt solution…

Debt consolidation mortgage
Homeowners might prefer a debt consolidation mortgage*, rather than a debt consolidation loan. You could replace your current mortgage with a new one that’s bigger: big enough to pay off the ‘old’ mortgage and your unsecured debts. Although this could increase your monthly mortgage payments, you’d no longer have to make payments to your other debts. Plus, you could arrange a longer repayment term for your new mortgage, which could seriously reduce your monthly mortgage payments (although it may add to the overall cost).

Debt management plan
Your unsecured creditors might agree to accept lower payments, freeze interest and/or waive charges. You can negotiate with them yourself, but many people prefer to ask a management company to do it on their behalf – a professional debt management plan can remove a lot of the stress that debt can cause, as well as bringing your monthly debt payments down to an affordable level. Again, making lower monthly payments may mean you end up paying more in the long run.

IVA (Individual Voluntary Arrangement)
If your unsecured debts are around £15,000 or more, perhaps you should find out more about IVAs. An IVA is legally binding agreement, backed by government legislation, between you and your creditors. In an IVA, you agree to pay a fixed amount for (normally) five years, and they agree to freeze interest and write off any outstanding debt when the IVA is successfully concluded.

• You need to think very carefully before taking out a debt consolidation mortgage, as your home could be at risk if you don’t keep up with repayments to a debt secured on it.

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