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There are various forms of short-term debt solutions on offer at the moment, such as mortgage holidays, car finance holidays, and credit card repayment freezes.
At first sight they can appear a tempting offer: you get a couple of months of financial relief during this hard time, but are not harming your credit score. It seems like a win-win, right?
Maybe not. In the long-run, these debt solutions are actually likely to cause you more hassle than help. Avoiding short-term solutions if you can is the best option. There are other ways to get help and prevent yourself from falling into further debt. (On that note, if you’re being chased by Advantis debt collectors, you might not have to pay.)
There are various short-term debt solutions out there including payment holidays, bank loans, payday loans, and credit card payment freezes.
Whilst they may offer immediate relief if you’re suffering to make ends meet, they can actually lead you further into debt. Anything not paid back now will still have to be paid back at a later date. By then the balance will have incurred more interest and potentially other fees and charges, actually increasing the total you owe.
There are a few cases when a short-term solution may help. For example, if the payment holiday is taken when you’re on maternity leave but you know you’re returning to a full income soon to make repayments.
However, for the most part, short-term debt and payment holiday solutions should be avoided. Whilst you’re not paying the monthly balance back they are still accruing interest, increasing the total balance you have to pay.
Taking out extra credit now is another short-term debt solution. However, taking out lots of these in a short space of time – particularly with options like payday loans or high-interest credit cards – can also damage your credit score. This will make it harder to access credit in the future (including things like mortgage deals – so you’ll have to pay more on those in the long-term, too).
If you take a payment holiday, your deferred payments could either be spread out over the outstanding term of your loan or you might see a smaller increase in your monthly repayments but paying it back over a longer term, meaning paying more in interest.
Both options can lead to additional stress as they affect your future finances – especially if you take payment holidays on more than one line of credit.
If you have taken a payment cut or lost work altogether, taking a payment holiday will make it harder for you to pay back a few months later due to the loss of income.
Down the line if you can’t afford the increased payments or longer term of your loan, you may end up seeking another loan or line of credit to pay the first back. It is easy for these debts to spiral and to borrow more on a short-term basis as your needs require.
As soon as you start worrying about debt contact one of the many free UK debt charities that can offer advice and plans.
Avoid payday loans! The fast cash is not worth it. Over a year the average annual percentage interest rate of charge (APR) could be up to 1500% (that’s not a typo!).
Payday lenders set up a recurring payment (CPA) where they can take what you owe directly from your bank account on the repayment date. This is very risky as it can leave you short for rent or mortgage payments and essential spending. If you have problems paying, payday loan lenders may offer to roll over your loan, but it will cost you a lot more in interest and fees. Use this tool to find alternatives to getting a payday loan.
Credit card payment freezes should also be avoided if possible. Similarly to loan repayment holidays, not paying the balance every month means it continues to gather more and more interest and you pay more back in the long run. Also, if you miss payments that you then can’t afford, it can negatively impact your credit score.
If in immediate need for financial relief, one option would be to seek a shorter holiday. Instead of the three-month holiday offered as standard to those affected by coronavirus speak to your lender and see if they are willing to offer you a shorter length. This can free up some cash but minimises fees and interest incurred, as well as any future payments which won’t increase as much because of the short holiday.
Speak to your lender and see if you can arrange to pay back a smaller monthly amount. Paying something is the best option if you can’t afford the full amount at the moment.
Ask your lender to waive interest during this time as you’re still contributing payments. Coronavirus has impacted a lot of people and they may have leniency here.
Can you afford to carry on making interest or capital only payments? This will reduce any increases in your monthly repayments compared to other options. When your holiday is over, you will still need to pay back any shortfall in your normal monthly payments but there won’t be additional interest or charges.
It can be daunting to look at your debt and to not know how to begin paying it off, especially if your monthly income versus outgoings isn’t leaving much spare.
Start by going through your finances and create a budget. Reduce your spending where you can: are there areas you can cut back?
Pay off whatever debt you can afford. Leaving it will gather more interest and you’ll have to pay back more eventually. Remember though, don’t leave yourself short by trying to pay off a large sum in one go that then means you don’t have the money to afford current payments or food and utilities. Rather, work out what you can regularly afford to pay back in smaller amounts. Paying back something is always better than nothing.
You could be owed extra cash from all sorts of places – especially now so many things have changed this year. Find out if your insurance owes you cash, or if your electricity or gas bills are in credit. We’ve got a useful guide to claiming what you’re owed here.
If you have the free time, use it to earn extra cash. There are ways of making money online, or you can have a clear out of your home. Do you have a lot of unwanted and unneeded items in a decent condition? Sell them online, this can be a good way to earn a fair bit of cash you can then put towards paying off debt.
Short-term debt worries take a toll on our mental health. There are mental health and debt charities where you can talk confidentially for free help and advice.
Samaritans lines stay open 24/7 and can be contacted by telephone on 116 123 for free, or by letter, or email.
Mind is an excellent organisation that can help, call their infoline on 0300 123 3393, or text 86463, if you need help with mental health problems, want to ask about treatment, or where to get help.
For free debt advice try StepChange or National Debtline where they can help create a debt management plan for you. They will help you work out ways to manage your debt without resorting to short-term debt solutions which can worsen your situation.
Short-term debt causing long-term worries isn’t unusual. There are lots of people in your situation, too. That’s why we’ve created the MoneyMagpie Messageboard!
Connect with other Magpies, ask your questions and share experiences to help overcome your debt worries. You’ll even see the MoneyMagpie team and some vetted experts getting involved in conversations, too!