Debt is a family affair
In February the Financial Times revealed that an estimated 8.4m* – one in five adults in the UK – has unsecured debts of at least £10,000, and that many of these people are considering bankruptcy or an individual voluntary arrangement (IVA).
An IVA is a legally binding agreement with creditors to settle debt within a reasonable period, typically five years. Once the period has expired any outstanding debt is written off, however this may prevent borrowing in the future.
Bankruptcy and IVAs are extreme measures. Clearly it is important to avoid debt problems in the first place, and if you do find your debts unmanageable then you need advice to establish the best way to manage repayments.
Like good savings and investment planning, debt mitigation strategies start at home. If, as parents, you can set the right example, there is a strong chance that your university-age children will establish sensible habits from an early age.
This is important. The chances are that when you did your medical training student loans were barely a glint in the Chancellor’s eyes. For the academic year 2005/2006 the National Union of Students put the cost of university, including tuition fees and living expenses, at an estimated £8,500 a year, and more than £10,000 in London. Clearly, the longer the course – and this includes medicine, law or a postgraduate degree – the bigger the potential debt.
According to government-approved lender the Student Loans Company** the rate of interest on student loans is pegged to retail price inflation, which may be attractive compared with other commercial loan arrangements. However, saving in advance can help to keep your children’s debt levels to a minimum. If your children don’t need the money while at university, they will certainly appreciate help towards a deposit on their first home and this may have the added advantage that they avoid taking on excessive mortgage debt early in their careers.
In guiding your children on debt as they emerge from University (or even earlier), it is worth bearing in mind the following tips:
• One in five people choose to arrange their new mortgage on an interest-only basis, according to a recent report from the Financial Services Authority.*** In these cases the capital must be repaid in full at the end of the mortgage term, so it makes good sense to establish a strategy for repaying the capital
• If you do need a loan and are looking for a commercial lender (rather than friends and family, for example), make sure it is from an authorised individual or company. Lenders require a license from the Office of Fair Trading (OFT). Pay off credit card and store card debt as a priority each month. With rates of interest often exceeding 20% per annum, this is an expensive form of debt
• If you need money to cover a short-term requirement and you expect to have the capital to repay the debt within a matter of months, then look at your bank’s overdraft terms – and remember that if you breach these terms you may be penalised. It may also be worth using a credit card that offers 0% interest for a fixed period. A study from MoneyExpert.com, the financial comparison website, found that 15% of consumers used a credit card with a 0% rate to consolidate their debts
• If your borrowing is likely to be repaid over the medium term, then consider a bank loan – and don’t assume your high-street bank is your best bet. Shop around and check the annual percentage rates (APRs) and the total amount repayable (TAR). Try to arrange repayments over the shortest period affordable
• If you have several loans, then consider ‘consolidation’ but be aware of the pitfalls. Consolidation usually refers to the arrangement of a single loan, which will enable you to repay all of your existing debts. Look for flexible repayment terms with no penalties
• Consider your potential liabilities if you arrange a secured loan – for example a second mortgage on your property – and don’t be persuaded to buy payment protection insurance (PPI) if you don’t need it, as it will add to your costs. PPI terms and conditions are under regulatory review at the moment.
If you do experience problems keeping up repayments, don’t stick your head in the sand and hope they’ll go away. Lenders are far more likely to accept reduced repayments for a while if you discuss your problem with them and keep in regular contact.
The above information does not constitute advice, an analysis of your circumstances should be undertaken before any advice can be provided.
*Financial Times, 1 February 2007, with reference to a report from Thomas Charles, the debt consultancy.
** Student Support Direct (www.studentsupportdirect.co.uk).
***FSA, ‘Interest-only mortgages’, December 2006 (www.fsa.gov.uk).
Wesleyan Medical Sickness provides specialist financial advice for dentists. For further details ring 0808 100 1884 or visit http://www.wesleyanmedicalsickness.co.uk/