Comprehensive Guide to Consumer Debt

Ian Lewis[1]

Ian Lewis

Money Savings Advice Comprehensive Guide to Consumer Debt

Are you interested in learning all you'll ever need to know about consumer debt?

Most of us end up in debt at some point in our lives. Whether you buy a car on finance, shop with Klarna, or use a credit card to buy your groceries, you'll be in a position where you've borrowed money to cover the costs of a purchase.

Keep reading and learn more about consumer debt with our comprehensive guide, designed to answer all the questions you might have:

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Different Types of Consumer Debt

There are many different ways to be in debt. Some people have one type of debt, whilst others have debt in several different places. Types of debt include:

Credit Card Debt

With a credit card, you're given a credit limit. You can spend up to your limit, pay the money back and then choose to spend it again. The money is accessible for as long as you want it.

Store Card Debt/Catalogue Debts

Store cards are credit cards that you can only use with one specific store or group of stores. They can encourage brand loyalty. You could also have a catalogue store account without a physical card. Often you can use them to buy an item and start paying back straight away, or to get a Buy Now, Pay Later Deal.

Overdraft Debt

Like a credit card, an overdraft gives you a credit limit so you can keep spending and repaying. You can use your overdraft, pay it back, then use the same limit again. Some people live in their overdrafts, as their debt is attached to their bank account, so their salary clears their overdraft debt, and they'll then dip into it again.

Loan Debt

With a loan, you'll borrow a specific amount of money. You usually pay back a specific amount every month. Once you've cleared your loan debt, this line of credit is gone.

Buying on Finance Debt

When you buy on finance, you'll take out a loan for a specific item you're purchasing. This could be something small, like an item of clothing, or something far bigger like a car. Some items on finance are bought on Hire Purchase, so they belong to the seller until you've cleared your debts. When an item is bought on Hire Purchase, it can be taken back by the seller if you can't keep up with payments.

Mortgage Debt

For most people, the mortgage is the largest debt they’ll ever have in their life. Mortgages are enormous loans to cover most of the cost of a house. Most people will pay their mortgage debts back for decades.

Bill Arrears Debt

If you can’t afford to pay your bills, you could end up in arrears. This might eventually lead to services being cut off. If you’re consistently paying less than you should, your bill arrears can mount up over time.

Council Tax Debt

Council tax debt is a type of bill debt but is a high priority issue. If you can’t pay your council tax, you can be visited by bailiffs or even sent to jail.

Informal Debts

Informal debts might be money you’ve borrowed from your friends and family. This will still need repaying and can weigh just as heavily on your mind as more formal debts. Loved ones might be more lenient, but owing money can also destroy a relationship.

Different Stages of Debt in People’s Lives

At different stages of life, people typically have different types of debts:

Young Peoples Debt

Young people often have fewer financial responsibilities. Much of their debt will come from credit cards, store cards, and overdrafts. Even at a young age, people are encouraged to take out a student overdraft when they first go to university. Often, young people are targeted by debts that come with an interest-free period. Sadly, many end up trapped in debt when they can’t clear their borrowing in time.

Middle Aged Peoples Debt

Slightly older adults will usually have the most significant debts. They might have large mortgages but might also have large loans against other items like a car that they’ve bought on a hire purchase agreement. People in this age group have borrowed lots of money to fund the lifestyle they want, which often means that they’re making large debt repayments every month from their salary.

Older Aged Peoples Debt

Hopefully, by their later years, people have cleared their mortgage debt and purchased their vehicles outright. However, these years must often be lived on a low income. This is an easy time for people to fall into bill arrears and struggle with the basics. Older people might borrow money from their younger relatives or fall behind on essential payments through lack of money or a hard time keeping up with incoming bills.

How People Get into Debt

Many people are taught from a young age that debt is bad. Parents hope that their children will learn from their own mistakes. Debt becomes a taboo subject, with many people getting into debt without a full understanding of what it really means.

Car Debt

If you can’t afford to buy a car outright, you are not alone. Buying a car on finance is a common way to acquire one. Usually, you’ll buy with a Hire Purchase agreement. You’re borrowing the car until you’ve made the final payment – often a balloon payment at the end of your agreement. Once you’ve cleared your debt, the car is yours.

You can clear car debt over several years, but the car is losing value as soon as you’ve purchased it. If you’re in an accident and write off the car, you will still need to pay back whatever you originally borrowed.

Unsecured Borrowing Debt

Getting into unsecured debt is a less informal experience. Here, the debt is secured against the thing that you’re buying with the money. The most common type of secured debt is a mortgage. If you can’t keep up with repayments, you’ll risk losing your house or whatever else you’ve purchased.

Secured debt is a big commitment, but often people agree to these debts because there’s no other way to buy the item. Very few people ever have the money to afford to buy a house outright. These big debts are ones taken on in the hope that nothing ever goes wrong. In some cases, this means clearing debt for decades of your life without a break.

Payday Loan Debt

Once even worse than they are today, payday loans are short-term loans intended to be paid back very quickly. You’ll borrow a small amount of money, just enough to bridge the gap from one payday to the next. The idea is that when you next get paid, you’ll clear your debt and get back to normal. The problem is that if your wages weren’t enough to cover your expenditure one month, then you’ll be in the same position next month but with an extra debt to pay back.

Many people use payday loans with the hope that things will get better. They promise themselves that they can earn more money or sell things they own to clear their debt. It’s very easy to get into a debt spiral after taking your first payday loan, and these often come with high APRs, so the debt quickly grows.

Loss of Income Debt

Whilst some people choose to borrow money to live a lifestyle they can’t afford or to buy an item they see and want with the promise of paying for it later, many people get into debt because they’ve simply no other option.

You might be in debt because your wages have decreased, you’ve been ill, or you’ve lost your job. Any loss of income, for whatever reason, can leave people dependent on debt. If you’ve been made redundant, your redundancy pay-out will not keep you going for long. Other types of loss of income don’t even come with lump-sum payments, so it’s very easy to find yourself unable to pay for essentials like bills, groceries, or rent.

Even temporarily losing some income can lead to long-term debt. Once you start borrowing, it only gets harder to repay what you already owe. You might need to borrow more money as a way to clear your existing debts until soon there’s no way you’d ever be able to keep up with all the different payments.

How Do Different People Deal with Debt?

Burying Your Head

If you bury your head, you’re ignoring your debt or trying to cope on your own. This is a common and very understandable approach. We’re taught from a young age that debt is bad, so we’re ashamed to admit when we’ve borrowed. This can stop people from reaching out for support that could help them clear their debt.

Burying your head can make it much harder to repay all the money you owe. It can also lead to mental health problems, as you’ll end up struggling alone. Some debts, if ignored, can lead to consequences like CCJs and bailiff visits.

Managing Personal Debt

Many people choose to manage their debt on their own. This can take a lot of willpower and strength. You might need to contact your creditors and talk through your repayment options. You may need to create and stick to a detailed budget. Managing debt on your own is possible but often becomes very difficult.

Getting Help With Personal Debt

Getting help with debt is the most sensible option and can help you to get back on track. There are charities that can support you and take the strain away. If you get help with debt, then your interest might be frozen, and monthly payments might be reduced, giving you the freedom to breathe as you repay what you borrowed.

What are The Long Term Consequences of Too Much Debt?

If you’re already in debt, it’s important to know what’s likely to happen in the future. There are several different potential consequences if you’re in too much debt:

Mental Health Issues That Are Caused by High Personal Debt

It goes without saying that being in debt can take its toll on your mental health. From feeling the burden of taboo and secrecy to struggling to find a way out, a lot of different weights will be on your shoulders if you’re in too much debt.

Being in debt can lead to stress, sleepless nights, and eventually suicidal feelings. Seeking help is important, and debt should not be something that you’re ashamed of.

Reduced Borrowing Options Due to Personal Debt Levels

If you’re in debt, your credit file will be marked with your existing credit agreements. The more debt you have, the more you’re seen as a risk. Other lenders won’t let you borrow any money if it seems like you have lots of debt already or if your existing debt payments make up a large portion of your income. The more debt you have, the harder it is to find new borrowing options.

Serious Consequences When Your Personal Debt Is Too High

Some types of debts are more serious than others. If you have secured debts and can’t keep up, you could lose the items they’re secured against. Many people lose their cars and houses when they can’t pay what they owe.

Council tax debt is a priority debt that can lead to serious problems. If you can’t repay your debt, the council can take the money straight from your wages. If there are no other ways to get the money back, and bailiffs can’t take a property to cover it, you’ll risk a court case and a potential prison sentence.

If you’re in any debt, it’s important to know what the worst-case scenario might be. This can help you to prioritize your debts and decide which payments you should put first.

When Can Personal Debt Can Be a Good Thing?

Though we often see debt as something shameful, or an enemy that could ruin lives, there are times when being in debt can be a good thing.

Building Your Personal Credit Score

A bad credit score will stop you from accessing even the most basic lines of credit, like a phone contract. If you’ve never borrowed in the past, you won’t have much on your credit file at all. An empty credit file is almost as bad as a poor credit score, as it doesn’t contain any borrowing history that lenders can base their decisions on.

Many people choose to use small debts as a way to build up their credit score. This usually involves using a credit card to pay for everyday essentials, then immediately clearing the debt, so you don’t pay any interest.

Buying On Credit When You Can Repay

If you’re absolutely sure that you’ll keep up with the repayments, getting into debt can allow you to get hold of the items you want straight away. Instead of saving up to buy something you want, you can get the item immediately. You’ll then use the money you would have saved to clear your debt once you’ve made your purchase.

Just be careful, because we never know what’s waiting just around the corner. Many people feel confident that they’ll be able to keep up with debt repayments, only for an emergency expense or job loss to throw them off track.

Getting a Mortgage

If you want to own your own house, it’s very likely that you’ll need a mortgage. Houses are extremely expensive, and most people don’t have the cash ready. Taking out a mortgage is the path to homeownership, so you’ll be on the property ladder. You’ll then pay money every month to clear your mortgage debt. Otherwise, you’ll be renting your home and won’t have somewhere of your own. Renting is often even more expensive, but without a property to show for it.

Buying a Car on Finance

Many people can’t afford to buy a good car outright. Even scrimping and saving, they might only be able to afford a cheap second-hand vehicle. Buying a cheap car can mean that you’ll spend a fortune on required repairs and maintenance, whilst a newer car (even second hand) can lead to a lot less work and be significantly cheaper to run. If you can’t afford to buy a car, using debt can allow you to get a vehicle that you can trust and rely on.

When Can Personal Debt Can Be a Bad Thing?

Though debt can be a good thing in very specific circumstances, more often than not, it’s a problem. Debt’s the kind of issue that can keep getting worse, becoming even harder to manage.

Debt Spiral

Debt Spirals Are a Common Debt Issue

Imagine that you receive £1,500 per month. Your salary is used for essential bills, with nothing set aside for rainy days. Suddenly, your fridge freezer breaks. You borrow money for a new fridge freezer because you can’t afford to buy outright. You agree to pay this money back at a rate of just £30 per month. On your next payday, you receive your £1,500.

This money is needed for all your usual bills and everyday expenses. But you now need to find an extra £30 on top, to pay what you owe for your fridge freezer. You could try selling things you own, but you’ll be in this position every month until your debt is cleared.

What if your car breaks down one month, and you need to borrow more for the repairs?

Good Debt vs. Bad Debt

Something is classed as ‘good debt’ if it’s a good thing long-term. This might be a mortgage that helps you to avoid paying rent for someone else’s property. It may include a hire purchase agreement for the car that you’re driving, so you can buy a more reliable vehicle and save on maintenance and repair costs.

Good debt can lead to an asset, increased wealth, and a better financial situation. As long as you can keep up with your debt repayments, good debt can help you save money.

Bad debt doesn’t help you in the same way. With bad debt, there are no benefits aside from potentially getting something quicker. You don’t save money long-term with bad debt, often paying more than if you’d bought something outright.

It’s always worth knowing whether you’re making use of good debt or bad debt. Ask yourself, ‘Will this debt put me in a better financial position?’

Ways to Pay Back Your Debts Quickly

Once you’re in debt, your highest priority should be paying back what you owe. There are lots of different things you’ll need to do in order to clear your debts quickly.

How To Prioritize Your Debts

Prioritizing debts should be the first step if you owe money to more than one creditor. Put your debts in order of importance.

Unsecured debts won’t matter as much if you need to miss one or two payments. The interest can mount up, and your debt can grow, but you won’t risk losing your property. Secured debts are held against the value of something you own, which will add extra risk. These are higher priority debts, as you could lose your car or your home.

High priority debts come with even bigger problems than losing something they’re secured against. Council tax is the perfect example of high priority debt. If you can’t keep up with your debt repayments, bailiffs could visit your home. The money you owe could be taken from your wages before they even reach your bank account. In a worst-case scenario, a prison sentence may be applied. These kinds of debts should be top of the list when you’re choosing which debts you should focus on.

Should You Clear Debts or Save Money?

You’ll be able to clear your debt in one of two different ways. You could increase your income, or you could reduce your expenditure. Many people use a combination of the two, pruning any non-essential costs whilst selling items they don’t need, working overtime, or getting a second job.

Once you find yourself with a bit of extra cash, you’ll be left with two options. Do you use the extra money to clear your debt now or put it in a savings account?

In the vast majority of cases, you should use spare cash to clear your debt quickly. Every payment you make will reduce your owed interest and stop it from mounting so quickly. The faster you clear your debts, the less you’ll end up paying overall.

The only time when it’s more sensible to save is when you don’t have a rainy day fund. Your existing debts might stop you from accessing other funds in an emergency, so it can sometimes be better to put money aside in case unexpected costs arise. That way, you can keep clearing your debts without borrowing even more money.

Getting Debt Help and Debt Support

Clearing your debt will require you to earn more money than you’re spending. In some cases, debt costs are so high that it might seem there could be no way out. If you’re really struggling, speak to your creditors or to a debt management charity.

Your creditors have a responsibility to not leave you drowning in debt. If you tell them you’re struggling, they should freeze your interest or reduce your monthly payments. Reducing monthly payments will mean that you’re in debt for much longer but should give you breathing room to buy other things that you otherwise couldn’t afford. Your creditors may ask to see your budget and proof of your existing income.

7 Ways to Clear Your Debt

If you’re in debt and want to get out, there are several different ways to make a change. You may need to ask for support and advice if your debt problems feel overwhelming.

Government-Backed Schemes and Debt Management Charities

If you’re looking for a government-backed scheme, be very careful who you approach. Many companies suggest that they’re government-backed whilst charging a fee for their service.

You don’t need to pay for a debt management service, as charities will do this free of charge. Contact a debt management charity that’ll help you weigh up all your options.

Getting Out of Debt Through IVA (Individual Voluntary Agreement)?

A form of insolvency, an IVA is one option for dealing with debt. You’ll agree to continue to pay what you owe for a period of 5-6 years. Once you reach the end of this period, all remaining debts are written off.

An IVA is a useful way to keep light at the end of the tunnel if you’re in unmanageable debt that you won’t clear throughout the next half-decade.

Getting Out of Debt Through Bankruptcy

Another form of insolvency, bankruptcy, clears your debts faster. With this option, your debts will be written off, though you may lose assets like your vehicle or house in the process. Bankruptcy helps you to wipe your slate clean, though your credit score will be badly damaged, and you’ll struggle to get financial products. You might lose belongings and any spare money, so you’ll start again with almost nothing.

Getting Out of Debt Through a Debt Relief Order (DRO)

If you choose to apply for a DRO, your financial situation is monitored. If nothing’s improved within the next year, your debts will be written off. During your DRO period, you can’t borrow any more money, or you’ll risk prosecution.

Getting Out of Debt Through a Debt Management Plan (DMP)

With a DMP, your debts are not written off. This option isn’t a form of insolvency. Instead, you’ll give your spare money each month to a debt management company or charity. On your behalf, they’ll negotiate with lenders and make payments. Usually, creditors freeze your interest and accept reduced monthly payments. Some creditors might not agree, and they’ll usually want to see your budget to make sure your offer’s fair. You’ll continue to make a payment every month until your debts are paid off.

It’s likely that your DMP will extend the length of time you’re in debt. On the plus side, you’ll only pay what you can afford, so you won’t feel like you’re drowning every month.

Money Savings Advice Tip

If you are currently struggling to repay your monthly debts you are not alone. There are over 8 million people in the UK who are struggling with debt. Our advice is to take charge of your debts and speak to a debt specialist company who can help you understand the options available to you. Specialist debt companies can help you liaise with your creditors and put a repayment plan in place that enables you to stop stressing about the monthly repayments.

Getting Out of Debt By Borrowing Money from Friends and Family

Going cap in hand to friends and family might be a source of embarrassment, though it’s very likely that they’ll happily help if they’ve got spare money available. You may need to explain how you got into debt and assure them that lessons have been learned.

Using family funds to clear your debt means that the total stops climbing. There’s no more interest being added, so your total debt figure is frozen. You can then pay your loved ones back in a more relaxed manner. It can help to stop dealing with faceless and impersonal companies, though do watch out for the risk of damaged relationships.

Getting Out of Debt By Getting a Debt Consolidation Loan

To get a debt consolidation loan, work out how much you owe overall. It’s likely you have debts in several different places, so bring these together on paper. You’ll then take out one larger loan, allowing you to clear all other debts with the borrowed money.

Debt consolidation loans can reduce the amount you need to pay every month. They can also make your debt a lot easier to manage since everything you owe is in one place.

Unfortunately, debt consolidation loans can also make debt problems worse. You might be in debt for longer overall, and your payments won’t reduce every month. If you’d kept separate debts, some would likely have been paid off before others. Over time, the amount you spent on debt every month would decrease. By bringing everything together in one monthly payment, you won’t see a gradual reduction in your budgeted expenses.

Debt consolidation loans also only work if you close all your other lines of credit. If you leave your other lines of credit open, you could be tempted to keep using them. Then, you’d be in even more debt than before.

Consumer Debt: A Summary

There are very few people that go through life without debt. There can be good reasons to get into debt, but often it’s more trouble than it’s worth.

If you’re in debt, the best thing you can do is stop burying your head in the sand. Create a thorough budget, seek help if you need it and find ways to regain control. Debt help is available, and there are lots of routes you can take to a debt-free future.

How Can Money Savings Advice Help You Reducing Your Debt?

Here at Money Savings Advice, we have partnered with some of the UK’s debt release brokers. They have already helped thousands of people reduce and remove a high percentage of debt, and if you are struggling with debt, they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers, then click on the below and answer the very simple questions.

Money Savings Advice Author Ian Lewis

Ian Lewis

Ian Lewis is one of our specialist financial writers. Ian has over 15 years of financial writing experience, having worked for some of the largest financial publications in the UK covering topics from mortgages, equity release, loans and financial claims, to name a few.

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