Debt Advice & Debt Help

Debt is the first great destroyer of wealth, the other two being taxes and inflation.  However, debt CAN help to generate wealth IF it is used correctly and managed.

There are many forms of debt which include: secured; unsecured; private; public and; syndicated.  However, all debt can be placed in to one of two categories: good debt and bad debt.

Good Debt

When something is borrowed to be used for the production of something of value, then this is said to be good debt.  The thing borrowed (usually money) is employed to create something of value greater than the amount that is borrowed.  This is the basis of all enterprise and virtually all businesses, corporations and governments take on debt for the production of something of value.

Most business and commercial debt can said to be good debt as it is used for the production of something - that is of course as long as the business is successful and makes profit.  Can you think of some examples of good debt?

Examples of Good Debt

• A directors loan taken out for a viable new business

• A business loan made by a bank to an existing business with a good trading history to help that business expand

• Asset finance that is secured against company assets to help a business expand its market share and profits

• Bonds - a company can borrow money from private investors by issuing bonds.  This commits them to pay back the original amount borrowed plus interest at a set future date, or date intervals

• A mortgage taken out by a buy-to-let investor who buys properties at under market value, improves the property and then either sells it on or rents it out

• An experienced investor borrowing money to leverage his/her investment positions

Bad Debt

When something is purchased on credit simply to be consumed, then this is classed as bad debt.  This form of debt is usually created through things like mortgages, car finance, personal loans and credit cards and is commonly known as consumer debt.

While consumer finance offers people convenience and the means to buy expensive items without having to pay cash, almost all consumer credit has to be paid back with interest.  This means it can be expensive to 'buy now and pay later' especially if the interest rate is quite high.

Examples of Bad Debt

• Taking out a loan to buy an expensive car, or buying the car on finance

• Paying for a holiday on a credit card and paying the debt back monthly

• Buying 'stuff' on credit such as clothes, electrical items, furniture etc.

• A residential mortgage - as the definition of good debt is money that is used to create positive cash flow, then a residential mortgage is actually classed as bad debt as it is a financial drain on the debtor

The Credit Crunch

Do you ever wonder what caused the 'credit crunch' of 2007 / 2008?  Why was credit relatively easy to obtain and then almost overnight, much more difficult?

The main cause of the credit crunch was that banks and other financial institutions lent more money to consumers, businesses and even governments than could ever realistically be paid back.  Many economies were increasingly operating on increasing levels of debt and the securitisation and movement (risk management) of the debt had reached its limit.

As people and businesses started to default on their payments and it became apparent how over-leveraged these financial institutions had become, investors in these institutions became increasingly aware that they would stand to lose money as more and more defaults were occurring.  With more and more defaults and more  and more investors moving their money out of bad debt based investments, this triggered the collapse of some huge global banks and insurance companies.

The bad news for the public is that many of these failed institutions have been bailed out by the Government with tax payers money.  Banks have also had to improve their balance sheets and tighten their lending criteria, which has negatively affected many businesses and home buyers.

The situation above is simply the result of lending too much money, too easily to the wrong people or organisations.  When that happens, a lot of the money that is leant out does not come back and those debtors pay through having assets seized, having their credit rating negatively affected, being made insolvent / bankrupt or sometimes all of these negative experiences.

Getting Out of Personal Debt

If you are in debt, then the first step is to do an audit of your current financial situation.  Most bad debt can be attributed to neglect.  Neglect in saving, spending and borrowing.  This is usually down to a lack of financial planning.  If you haven't made a personal financial plan or haven't reviewed yours for more than a year, do it now.

>>> Download Your Free Personal Finance Spreadsheet

The next step is to learn about your various options to get out of debt.  You will probably want to seek professional debt advice but here are some of your main options:

• Consolidate expensive debt (e.g. credit card debt) into less expensive debt e.g. a secured loan

• Talk to your creditors - be honest with them and let them know that you are struggling with payments, but you want to do your best to pay off the debt based on your current circumstances

• Start a Debt Management Programme if you cannot afford payments to your creditors after priority payments such as a mortgage / rent and bills

• Enter into an Individual Voluntary Agreement (IVA) to legally 'write off' a proportion of your debt

There are also some other options which may help, depending on your personal circumstances:

• Increase your income by working overtime, taking on a second part-time job or joining a direct sales company to earn an extra income

• Sell any unwanted items you own through eBay or a car boot sale for example

• Check if you are entitled to compensation by making a financial claim

>>> Speak to a qualified Debt Advice specialist
>>> Speak to a qualified financial claims adviser
>>> View a list of part-time jobs
>>> View a list of extra income opportunities

Once you have taken action and made a plan to get out of debt, you must review the habits that got you into a position of debt in the first place.  For some, this may be circumstantial and largely beyond their control e.g. loss of work or divorce.

For other people, personal debt builds up as a result of wanting everything now, and buying too many things on credit.  If you want more, you have to be more and earn more first.

Tips To Help You Live A Debt Free Life

• Decide what you really want in life and then work out how much income you need to build and sustain that lifestyle
• Make a personal financial plan and stick to it
• No matter how much you earn, make a firm decision to save at least 10% of your income in a high interest savings or Cash ISA account for example
• Make it automatic, so the money comes straight out of your main bank account each month into your savings / ISA account
• Develop a more frugal attitude - make sure you're paying competitive rates on your utilities and groceries, take advantage of loyalty schemes and vouchers, turn off lights and electrical appliances when you're not using them etc.
• If you want more, be prepared to work for and earn it first.  The quick-fix mentality is what has created the huge amount of consumer debt in developed countries
  

Useful Links

>>> Personal goal setting
>>> Personal financial planning
>>> Debt consolidation loans
>>> Debt Management Plans
>>> IVAs
>>> Questions and answers about bankruptcy