Personal loans are also known as unsecured loans. As they’re not secured against your property, and aren’t priority debts, you have more control over how you manage your personal loan debt.
Personal loans are loans that you might have taken out for any purpose, from going on holiday to buying a car or renovating your home. They range from low-value loans, like a small amount of money to replace an old kitchen appliance, right up to large loans like personal loans that you’ve used to travel the world.
Personal loans are unsecured and aren't treated as a priority debt. If you have debt and can't make the minimum payments, you will default on the loan, which will result in extra charges and a mark on your credit file.
A personal loan isn’t secured against your home or any other property. Personal loans aren’t a priority debt, and the lender can’t take money from your account in order to claim what they’re owed.
The consequences for falling behind with personal loan debt are not as severe as with other types of borrowing, though this doesn’t mean that you should ignore any loans that you should be paying back.
Read on to learn more about personal loan debt and how you can tackle it successfully.
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The term ‘priority debt’ is given to debts where there are very severe consequences for falling behind. Council tax debt is one example. If you miss a payment deadline, you risk owing the full amount in one go. The council can access your wages or benefits, taking money before it even gets to you, and if that’s not enough they can send in the bailiffs or even send you to court to be sentenced.
Personal loan debt isn’t a priority debt. This doesn’t mean that you can ignore it, but does mean that if you miss a payment or two you won’t suddenly owe everything back. The lender can’t take your wages away, and you’re not going to be sent to prison.
That said, there are still consequences for falling behind on debt payments. You’ll damage your credit rating, rack up interest charges and may have to declare yourself bankrupt.
Before you borrow money, you should be aware of the lender’s terms of repayment. Lenders should tell you how much you owe in total, and when it’ll need paying back. You’ll usually receive a payment schedule, which lists your payment dates alongside how much you’ll owe on each payment date.
Your payment schedule should list the total value of your loan, but also how much you’ll pay back in total if you stick to your original agreement. The amount you pay back is higher than the amount you initially borrowed, because of the interest that you’ll pay on the money you’ve borrowed.
Usually, personal loans have terms of 3-5 years. Your loan may need to be paid back over a shorter or longer period.
If you start to miss payments, even more interest will be added. You may be charged late payment fees, and the final date of loan repayment will get pushed further back. In the meantime, you may be issued with a County Court Judgment (CCJ).
If you’re in personal loan debt and can’t keep up with repayments, lenders can take legal action. They’ll usually start the debt recovery process by calling you or sending you letters.
If a lender takes legal action, a CCJ is a legal requirement to pay what you owe straight away. If you can’t, this sits on your credit file and can affect it for up to six years. A CCJ will limit further opportunities to borrow, being especially damaging if you’d hoped to use car finance or apply for a mortgage in future.
Lenders can apply to the courts for the right to send bailiffs to your property. Bailiffs may see if you have anything of value to be used to repay debts. If that’s not effective, the lender can petition for your bankruptcy.
Focus on any secured or priority loans ahead of your personal loan debt. If you’re managing your priority loans, or don’t have any, then repaying your personal loan debt should be your next course of action.
If you can’t keep up with the agreed repayment plan, it’s best to contact the lender. Many lenders are happy to reduce your monthly payments and wait longer to get their money back, though they may need to see your household budget or some evidence that you can’t afford the repayments you initially agreed to.
If you have several debts that you’re struggling to manage, it may help to contact a debt management charity who can manage your debts on your behalf. These charities will usually find the most suitable way to help you repay what you owe. In many cases, lenders will stop charging interest if you show that you’re struggling financially.
If you’re not in too much difficulty, you can handle your personal loan debt alone. Sit down with your budget, and find ways to cut costs every month. You may be surprised how much money you can save by cancelling a few subscriptions, changing to a different energy provider or trimming your grocery budget.
Sometimes, simply changing your priorities is enough to help your pay back what you owe.
Debt consolidation loans are one option for people that are struggling with debt. If you have debts with several different creditors, you can take out a larger loan that covers all these debts. Then, you’ll have debt in just one place and only one repayment every month.
A debt consolidation loan can make your debts easier to manage, and may even work out cheaper if you’re currently paying high-interest rates and charges elsewhere, but this type of loan will typically mean that you’re getting into even more debt. You’ll need to borrow enough to cover all your loans, and their interest, with your new debt consolidation loan having added interest of its own.
Your monthly repayments may be lower with a debt consolidation loan, since you’re only paying one creditor rather than several every month, but you may be in debt far longer as a result.
If you apply for a debt consolidation loan, it’s important to clear and close any other lines of credit. Don’t pay off what you owe, then give in to temptation and borrow even more than before.
According to StepChange Debt Charity, personal loan debt is one of the biggest drivers of debt issues in the UK. It is not the most common debt – 48% of customers had personal loan debt compared to 68% of people who had credit card debt.
However, it is the highest value debt. StepChange customers’ average personal loan debt is £8,809, higher than any other type of debt including credit cards (£7,542).
What this tells you is that people are taking out high amounts of personal loans and then struggling to pay them back. The average debt of nearly £9,000 per customer is huge, and clearly indicates the problems that can occur if you don’t keep up your repayments or you don’t budget properly when applying for a loan.
Debt charities provide advice about personal loan debt-free of charge. They will be able to help you find a way to pay back what you owe. Mounting personal loan
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.
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