Types of Debt

Debt is unavoidable. The average Scottish household owes £13,000 in debt – and that figure does not even include their mortgage. The availability of cash through loans and credit has revolutionised the way we manage our finances. This new access to money can be a great way to help better our lives and provide for our children. However, manageable debt can easily spin out of control and start to hold us back rather than push us forward. This unmanageable debt is a problem that we can work through together making use of various legal and government legislated procedures.

types of debt

While Types of Debt Can Vary Widely, We Can Generally Divide Them into Two Separate Sections:

Secured Debt
Secured debts are taken out against an asset. For example, when you apply for a mortgage you take it out against your home. If you cannot meet your payments the bank will take the asset, in this case your home, and liquidate it (sell it) to meet the repayments. Secured debt allows those without a particularly strong credit rating to borrow, as the lender can instead focus on the potential value of the assets the loan is secured against.

Unsecured Debt
Unsecured debt, however, is not insured against anything. If you, the borrower, cannot meet the repayments then they are forced to take less predictable action against you, such as suing for the money they are owed or even taking and selling your possessions. Since these loans are riskier for the lender, as they cannot simply sell your house in the case of a mortgage, or car in the case of a vehicle lease, higher interest rates are attached. This can cause a much bigger burden for the borrower and has more potential for becoming unmanageable.

We understand how easy it is for debts to get away from you, and have helped thousands of Scots across the country who are suffering from unsecured and unmanageable debt. Join Becky who described her phone call to us as the “best phone call [she] ever did” and contact one of our friendly and on-hand staff and take the first step in beginning your debt free life.

Types of Unsecured Debt:

Credit cards are a very attractive form of easily accessible unsecured borrowing. In a study conducted by Compare the Market they found that around 1 in 10 of the people they asked in the UK had “maxed out” on a credit card. However, while the overuse of a credit card may sometimes feel necessary, high-interest rates can be a fast track to unmanageable debt.

You can be hit with credit card fees for many reasons. Perhaps other unexpected expenses have made you unable to meet the minimum repayment, or perhaps you have unknowingly gone over your credit card limit. It may even have been an emergency where the use of the card was simply the only option. Regardless, the additional fees and interest can cause the total you anticipated to be significantly higher.

When your credit card balance reaches a certain level, it may be the case that meeting the minimum monthly payment to avoid additional fees outside of interest is not enough to stop the balance rising. If you owe £2000 and have a minimum payment of £100 but an interest rate of 18%, then the balance will still have risen to £2242. Meeting minimum payments can lull you in to a false sense of security while your balance continues to rise.

Credit card debt is one of the most common ways your credit rating can be affected, reducing your ability to manage your finances in the future through secured borrowing. While it may seem like you will never catch up with your credit card payments a phone call to our friendly and dedicated team today can put you on the right track to tackling the problem and ending your struggle with credit card debt.

Store cards can be one of the easiest to fall into yet most unforgiving forms of unmanageable debt. The idea of instantaneously discount and delayed payment for is a tempting offer for many consumers, yet colossal interest rates can lead to major financial problems.

The pressure on consumers, especially those with the demands which come with supplying for families, can make it hard to pass up on the discounts offered by signing up for a store card. A 15% on the spot discount on paper is a great deal, but interest rates as high as 25-30% mean that unless the outstanding balance is paid off straight away costs can be massively increased.

They are also very easy to obtain as they are often given the go ahead regardless of the applicant’s credit rating. However, the affect they can have on someone’s perfectly good credit rating cannot be overstated. One customer we know of was late in paying an outstanding balance of only £18 by no more than a day. The problem only became apparent when she was applying for a mortgage a few years later.

The huge amount of store card debt owed in the UK is perfectly understandable due to the huge pressures on consumers, yet it cannot be overstated how much this crippling financial strain must be addressed before sky-high interest rates do an incredible amount of damage. Our understanding debt consultants are on hand to help you handle the problem, and are only one phone call away.

Scotland in particular has a problem with council tax arrears in comparison to the rest of the UK. Government authorities can take more extreme steps to gain possession of money they are owed that are simply not available to private companies, and as such should always be a priority.

After missing only one payment you will receive a warning letter demanding you pay what is owed within seven days. At this stage your credit rating may already be reduced. If you miss the payment again, then you will be asked to pay all outstanding debts and may lose your right to pay in instalments over an extended period (usually 12 monthly instalments or 10 with a two month break).

The authorities at this point may take money directly from your income, through either wages or benefits, making it difficult to keep on top of your finances and perhaps leading to more unsecured debt. Government bodies also have the option of sending ‘sheriff officers’, essentially bailiffs, to repossess your assets to repay the debt. In some extreme cases the inability or refusal to pay council tax can lead to a jail sentence of up to three months.

Being in council tax arrears is a serious situation which you must address as soon as possible, but with the right advice you are far from helpless. Reach out to one of our many understanding and accommodating advisers and let us help you end the stress of council tax arrears.

Falling behind on your rent is a particularly scary form of unsecured debt as it may mean, if left unaddressed, being forced to move out of your home.

If you have missed rent payments on your home then your landlord may take action to evict you. Your landlord cannot do this without first taking court action which can be a long, drawn out and stressful process for you and your family. If taken to court, you may still be allowed to hold on to your home provided you pay back the money owed and keep up with future payments. However, unless major changes to your finances are made it is most likely going to remain a struggle and ongoing battle.

When it comes to something as important as accommodation the necessity of tackling rent arrears is fundamental. Our friendly team is well equipped to help you get back on top of your rent payments and keep you, and your family, comfortably in your own home.

While overdrafts can seem like relatively harmless ways of getting access to more money they usually carry expensive interest rates which can, if mismanaged, quickly spiral out of control.

Arranged overdrafts can be a good technique of accounting for the many unexpected expenses that tend to crop up in life. Being able to gain quick access to a couple of hundred pounds from your bank can help to deal with things like essential home repairs or car trouble. However, overdrafts can often carry expensive interest rates which when not addressed quickly and managed properly can transform a seemingly harmless dip into some extra funds into unmanageable debt.

Unarranged overdrafts while holding the same high-interest rates can come with other extensive bank fees. Some banks will automatically lend you money in the form of an unarranged overdraft, for example if you buy something for £200 but only have £150 the bank will lend you £50. However, the bank may charge you significant amounts of money for this service which can lead to substantial financial trouble when paired with the troubling interest rates.

The easily accessible nature of an overdraft makes it one of the biggest sources of unmanageable debt for Scots across the country. However, with the right help your struggle with overborrowing from the bank and the fees attached can be a thing of the past. Reach out to our committed and on-hand advisers now to begin your journey towards a debt free life.

While payday loans are now under more strict government control in recent years the high-interest rates, as well as the short repayment period, can be a recipe for financial disaster which tanks your credit rating and force you to pay back up to double what you borrowed.

Payday loans may seem like a good way to manage unexpected expenses which you simply cannot afford using your regular wage they can very quickly become unmanageable debt. Since payday loan companies often charge a fee rather than interest, the short payback period doesn’t mean reduced interest costs. Borrowing £500 for a month may come with a 25% fee, meaning you have to pay back £625. An extra £125 on top of what was originally borrowed.

However, if you cannot meet the repayment, or take the loan out over a longer period (sometimes up to three months), then interest rates apply. Interest is now capped, meaning you cannot pay back more than double what was borrowed, yet it is likely that if you are in a position where a payday loan is necessary you will struggle to pay back such a steeply increased amount of money regardless of new legislation.

The lender may also ask for certain intrusive rights, such as direct access to your bank account. Using this they may attempt to reclaim debt outside of your control, harming your ability to pay more important bills. Payday loans can harm your credit rating too. Use of payday loan services can be seen by potential lenders and reduce the likelihood they will lend to you. Especially if repayments have not been met.

Payday loans are something to be avoided, but we understand that this is an easier thing in theory than in practice. While debts from payday loans can be an intimidating problem there is always a way back. Contact us today to take the first steps in tackling your financial trouble and begin your debt free life.

Income tax is a particularly serious problem due to the wider variety of tools government authorities have for reclaiming owed money. While for the majority of people income tax is dealt with automatically and is simply taken from your total wage, for self-employed workers there are many ways in which trouble with HMRC can arise.

Changes in business circumstances can affect your ability to pay proper income tax. Maybe an unexpected expense has caused you to borrow from the tax money you have set aside, or perhaps a change in expected income has undermined your ability to pay the tax you owe. Something as simple as a mistake when filing your tax return can land you in serious financial trouble when not dealt with appropriately.

Regardless of the reason, the nature of owing money to government authorities mean income tax debt is a very serious problem which can lead to repossession of assets and in extreme cases jail time. At debt free life our dedicated team of friendly advisers are only a phone call away and are ready to help you tackle your debts and make sure your finances back on track.