Home Finance Falling into Debt: What You Should Be Aware Of

Falling into Debt: What You Should Be Aware Of

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Many people try to avoid getting into debt but in reality, the vast majority of adults have some form of credit. In the UK, the average household debt was estimated to be £60,363 as of January 2020. Whether you’ve taken out a mortgage, got a credit card or are paying off a car loan, there’s a high chance that you’ll already have some debt to your name.

When debt becomes unmanageable, however, it can have negative consequences on your life. If you’re worried about falling into debt, here’s what you need to be aware of:

1. Debt Isn’t Always Bed

Providing you pay your bills on time and manage your finances, being in debt isn’t necessarily a bad thing. In fact, you might find it harder to obtain credit if you don’t already have existing debts. When considering credit applications, lenders will look at your credit history. Having some form of debt and paying it off regularly indicates that you’re a low-risk borrower, which means banks and other companies will be more likely to lend to you.

2. Life Changes Equal Increased Costs

When there are major changes in your life, you can be sure that increased costs will follow. If you move to a new home, for example, you may need to get a mortgage in order to finance the purchase or take out a loan to fund renovations.

Alternatively, having your first child or adding to your family can mean you’re facing increased expenditure. Fortunately, finance credit can help you to access all the things you need when you become a parent. If you want to get an idea of just how much having children costs, this guide has more information. With plenty of loan options available via New Horizons, there’s no need to panic about your budget rising. As a broker for market-leading lenders, New Horizons makes it easy to find out exactly how much you could borrow, without leaving a footprint on your credit history.

3. You Need a Budget

If you don’t already have an accurate household budget, it’s time to create one. Most people who fall into unmanageable debt do so because they don’t take a proactive approach to their monthly finances. If you aren’t sure how much you’ve got coming in or what your outgoings really are, you won’t be able to manage your spending accordingly. Sadly, this leads to people borrowing more than they need to and can result in a spiral of debt.

By creating a household budget, you can determine exactly how much disposable income you have each month and how much you can afford to make in loan or credit repayments. This information will help you to make the right choices when you’re applying for additional credit and ensure you don’t overextend yourself.

4. Variable vs Fixed Rates

If you aren’t sure what type of debt you have, contact your lender or take a look at your documentation. One of the most important things to determine is whether you have a fixed or variable interest rate. This will let you know whether your repayments are fixed or will change from month-to-month.

Remember – fixed interest rates don’t always last forever. Some loan providers will offer you a fixed rate for a limited period of time. After this, you may have the option to choose another fixed rate or switch to a variable rate. Be sure to stay up to date with your finances, so you can contact your lender ahead of time and negotiate a competitive rate.

5. Lenders Are Happy to Help

If you have existing debt and you’re struggling to manage it, lenders encourage you to talk to them. You might have unforeseen costs, for example, or unexpectedly lose your job. If so, try not to panic. By discussing your situation with your lenders, you can access a range of solutions, such as temporary payment holidays, reduced monthly payments, and/or frozen interest rates.

Ignoring financial problems is never the answer, so don’t be tempted to bury your hand in the sand and hope things will get better. When it comes to debt, a proactive approach is always best.

Take Control of Your Finances

If you’re not confident when it comes to managing your finances, you might find it helpful to access independent advice. As well as learning more about credit, loans and borrowing from free online resources, you can consult a financial adviser if you want to access bespoke advice.

Furthermore, potential lenders are always on hand to tell you more about their products and explain repayment terms to you. By considering all your options, learning more about the different types of debt available, and incorporating potential repayments into your budget, you can make successful and sustainable decisions when it comes to your finances.