Considering Debt Relief With A Loan
Today the average amount of credit card debt, per UK household, is £8,841 (excluding mortgages) and £55,567 including mortgages. Over 80% of UK households subscribe to at least one credit card; not surprisingly, there are over a billion credit cards in circulation. This means that the average UK household is carrying over ten different credit cards, and their relevant balances. Perhaps more alarming is that the majority of credit card use and revolving debt involves those individuals in the lowest income brackets. Debtors with the lowest incomes tend to be risky borrowers, and they tend to carry the highest debt burdens, pay the highest interest rates, and commit the most payment defaults.
Considering these statistics, it is no surprise that consumer debt relief is growing as a popular matter. In fact debt relief programs, and borrowing to relieve debt, have emerged as the most common way to relieve personal and household finances of the credit crunch. A Fool Survey on debt relief revealed that 39% of Britons (or four in ten) had acquired a loan to consolidate existing debt. The same survey showed that 43% of individuals (or three in seven) considered the use of a loan to consolidate debt. This is why lending for debt relief has become so popular. And it should serve as no surprise that a considerable number of British companies are emerging in an effort to improve upon the growing debt crisis.
Consumer Debt Relief Lending
Consumer debt relief lending is common among UK households with negative personal finance situations. Two of the most common lending avenues include loans that utilize your home’s equity and loans that borrow from your pension fund. The benefit associated with these types of debt relief loans is that both loans provide a substantial amount of money to relieve an equally substantial amount of debt. And they do it all at once, in one lump payment. The home equity loan has other benefits, including lower interest rates (typically lower than those of a credit card) and the borrower can deduct the interest paid on this type of financial loan.
A debt relief loan means that the borrower is utilizing equity, and borrowing from his personal financial security. This borrowing comes with the logic that he or she will simply pay the amount back. Yet one must be careful when using hard won equity as collateral. In cautioning about home equity lending, remember that the housing market is always in flux. This means that when borrowing a home equity loan, the home owner may end up owing more on the property than it is actually worth, especially if there is a major UK housing market correction. The same can be said for the borrower tapping into one’s pension: if he should lose his job, the amount borrowed from the retirement account must be repaid immediately. If it cannot be repaid, then the outstanding loan will be considered a premature withdrawal on the finances, and will be taxed and penalised accordingly.
Nevertheless, the home equity loan and the loan that borrows from the retirement account are both potentially ideal when consolidating debt. They can provide the resolution to the problem of substantial debt burden. The major caveat for both of these financial options is that two-thirds of those Britons who take advantage of these methods for consolidating debt end up using the credit cards again. They simply accrue more debt on the credit cards once the balances are absolved. Such mentality undermines the rationale behind consumer debt relief lending: if credit card balances are reestablished once they are transferred or consolidated, the idea of ‘relief’ is gone. The borrower will only be left with less equity in their home and/or less retirement savings in their portfolios. It is recommended, therefore, that consumers review all consumer debt programme information available, or contact an IFA (independent financial advisor), before risking their homes or retirement savings.
Published on September 19, 2007
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