Past Articles for January, 2008

Debt consolidation is the main reason for people taking out a loan without telling their partner or family about it, new research shows.

A report by Abbey shows some 1.3 million people have taken out a so-called secret loan, with 56 per cent admitting they used this money to pay off other debt.

The majority of secret loans were for £3,000 or less, Abbey found, with the average amount borrowed £5,720.

However, the value of five per cent of these secret loans exceeded £20,000 and reached as much as £50,000.

The debt advice offered by Paul Morrish, director of Abbey Loans, was for people to talk about their financial situation with others and guard against secret borrowing.

“However, for those who are comfortable they can afford repayments, it’s worth doing some research to find the most appropriate deal for you,” he added.

According to Credit Action debt statistics compiled last week, the average household owes £56,234.

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Financial planning is crucial if people want to avoid needing debt help after they have retired, it has been suggested.

Gary Shaughnessy, managing director of Prudential Retail Life and Pensions, warned that people retiring now will have to survive on “considerably less money” than the typical British adult.

He predicted that the situation is set to worsen, as fewer people reach retirement with the benefit of a final salary workplace pension scheme.

His comments come after Prudential found the average yearly income of people retiring this year will be £18,663, which is nearly £5,000 less than the median annual earnings for a full-time UK employee.

Mr Shaughnessy said: “It is absolutely critical that people seek professional independent financial advice when planning retirement.”

Last year, Callcredit research found that 16 per cent of those older than 55 seemed to have no debt management plan in place as they had no idea how much they owed.

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On average, women are less “financially fit” than their male counterparts, it has been claimed.

According to finance provider Abbey, women are more likely to be in a position where they might benefit from considering seeking debt help than their male compatriots.

A spokesperson for the firm said that this was largely due to the fact that women spend less time checking for competitive rates on financial products.

Nici Audhlam-Gardiner, head of mortgages at Abbey, said: “The other big thing for women is they tend to save up less than men do, so actually about 70 per cent of women say that they don’t have savings for any more than three months.”

Consumers who are struggling to find funds with which to build some savings might like to consider debt management - or for those in difficulty, an Individual Voluntary Arrangement - to free up the cash necessary.

According to a poll by ICM conducted on behalf of Abbey, the north of England was the least financially fit area of the country, with 46 per cent of consumers in an unhealthy position.

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Unexpected changes in people’s personal circumstances could result in “financial turmoil”, it has been suggested.

An article in the Daily Express, citing Moneyexpert.com statistics, claims that life events such as divorce, the death of a spouse or losing one’s job could cause serious debt problems for consumers.

It notes that becoming debt free is increasingly difficult, as budgets become “tighter than ever” as the price of council tax and energy escalates.

Changing personal circumstances could create a need for people to seek debt advice, the newspaper suggests.

It notes that proposed new laws could see them being given a respite from potential bankruptcy.

However, the new plans suggested by the Ministry of Justice – which will offer a debt solution in the form of an extended period of loan repayment – might not come into force for a few months.

Citing debt experts, the Daily Express suggests that the key is for those who need debt help to keep creditors informed of their financial situation.

Research published by personal finance website Fool.co.uk last year discovered that a fifth of people owing £20,000 could not afford repayments.

David Kuo, head of personal finance at the website, offered debt adviceand suggested consumers need to be sure they have a way out of their credit situation before borrowing.

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Industry standards have been established to reassure consumers of the conditions they can expect when considering an Individual Voluntary Arrangement, it has been announced.

The British Bankers’ Association (BBA) states that borrowers who are in need of debt help can now look forward to higher levels of transparency and improved advice.

Advertising, information and documentation standards are also set to be bolstered for the debt management industry.

Angela Knight, chief executive of the organisation, comments: “The BBA, the Insolvency Service and the participating IVA providers are united in support for this agreement, which should provide customers with the reassurances they need in order to make the right choice for their financial futures.”

She added that through the agreement, those applying for debt help through an IVA could be sure that they were receiving the most appropriate help with money.

In September, price comparison site moneysupermarket.com described that the number of people who did not fully understand the nature of IVAs as “staggering”.

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Those looking to become debt free could be affected by student loan debt, according to mform.co.uk.

The online mortgage company warns that plans to include student loan repayments in credit files will only include missed payments, as prompt payments will not have a positive impact.

“The average student can face debts of over £20,000 by the time they graduate and their average starting salary is around £16,000. Given statistics like this, many students miss one or more of their student loan repayments,” explains Francis Ghiloni, director of marketing and business development at mform.co.uk.

This news could result in black marks on credit records, highlighting the need to get debt free as soon as possible, as consumers could use money released from debt consolidation
to pay back student loans promptly.

Firstrung has countered the report, saying that it should not affect the ability of ex-students to get on the property ladder.

However, chief executive of Firstrung Paul Holmes pointed out that missed payments are “raked over a lot more intensely,” in the current financial climate, meaning those in doubt should seek debt advice.

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Independent Financial Advisors could help those looking to get debt free, according to research covering areas such credit card debt.

The survey, undertaken by the Association of Independent Financial Advisors (AIFA), shows that credit card debt could fall from £2.5 billion to £830 million if consumers sought proper debt help.

It was also noted that advice was needed to protect against unforeseen circumstances, such as illness, indicating that getting debt free can help protect against the unknown.

Director general of AIFA Chris Cummings said: “We’re calling on consumers to use financial advisers for all their financial needs including health protection, debt reduction and savings.”

The levels of consumer debt in the UK has led to AIFA calling three times as many financial advisors to help guide those in debt out of their problems, with schemes such as IVAs and other debt management schemes.

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An increasing number of people are choosing to rent their properties due to high costs, according to the UK Housing Review.

Results of the study suggest that average costs to income for first-time buyers are now higher than they were at the peak of that last housing boom in the 1990s.

Published by the Chartered Institute of Housing and the Building Societies Association attributes the growth in private rented sector to its competitiveness, which may reduce the need for consumers to draw up a debt management plan.

Author of the review Steve Wilcox comments: “Private renting has become far more competitive as an option for households compared to the cost of buying; the sector has grown by 21 per cent in the last five years across the UK and is fulfilling a significant role in the housing market.”

Those with an eye to gaining a place on the housing ladder in future, however, might like to think about ways to become debt free in order to become an attractive proposition for lenders.

Meanwhile, a report by Paragon recently suggested that the cost of renting property increased by as much as 19 per cent over the course of 2007.

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Housebuyers should avoid taking out bridging loans to tide them over between selling their own property and buying a new one.

This is according to James Molloy, product manager for AA Legal Services, who warned against this form of financing.

Bridging loans are short-term financing options that charge high interest rates and could worsen the situation of people trying to clear debt and become debt free.

Mr Molloy said such loans should not be taken on “unless absolutely avoidable”.

If the housebuyer has no option but to take on a bridging loan as a “last resort”, Mr Molloy advised that this should only be agreed for a finite period, for instance after exchanging.

He said bridging loans should never be seen as “a routine factor” in protecting a property chain.

“However, as with all financial products, appropriate advice in individual circumstances is essential,” Mr Molloy concluded.

This is Money notes that while higher interest is charged on bridging loans, taking one out could save consumers from losing money they had already spent during the purchase process.

It states that an alternative might be to remortgage and through this form of equity release, put a deposit on a new home.

The existing property is then let out and rental income is used to repay the mortgage.

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Inflation is putting pensioners under increasing financial strain, it has been revealed, leaving many struggling to avoid bankruptcy.

According to the Newcastle Building Society equity release service, real inflation for pensioners will be as high as seven per cent in 2008 - double the national inflation rate.

The main factors behind this hike are food and fuel, while council tax is also proving a burden.

“These findings paint a bleak picture for pensioners in 2008,” commented Bob Mottershead, retail sales executive at Newcastle Building Society.

“The rising cost of living is undoubtedly a concern for us all, however, commonly it is those in later years who suffer the most. For the many relying on the basic state pension of just £87.30 per week, these increases could negatively impact everyday quality of life.”

In order to reduce the financial strain they are under, many pensioners are turning to equity release as a solution, Mr Mottershead said.

He suggested that equity release was especially popular among asset-rich, cash-poor retirees as they struggle to make ends meet.

According to the Department of Work and Pensions, there are currently 1.1 million pensioners living in poverty.

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