Martin Lewis predicts interest rates will continue to rise
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In response to the cost of living crisis, last week, the Bank of England (BoE) increased its interest rates up to 1.25 percent with the rate expected to increase further throughout the year. The increase then has a ripple effect on the rates of interest set for personal loans, overdrafts, and credit cards. As people are turning to borrowing to help through the cost of living crisis, many are at risk of getting caught in a “debt trap”. This is a situation where a person is forced to take out new loans in order to repay existing debt obligations. This can occur if a person spends more than they earn, but can happen if unexpected bills hit such as a broken washing machine or car maintenance.
David Hendry, chief marketing officer at Freedom Finance explains that personal loans have been commonly popular as they have been described as being a “relatively cheap” way of borrowing as they “typically” have lower interest rates than credit cards and overdrafts.
However, with interest rates looking set to rise, Mr Hendry states that it is “vital” that people look at their situation carefully before loans are taken out.
If loans have been taken out, there are a number of steps people should take to improve their financial situation which can either help to reduce the need for borrowing at all or make managing their borrowing easier and cheaper.
If a person has existing debt, particularly with multiple loans or credit cards, the first step is to work out exactly how much has been borrowed.
Mr Hendry suggests that people should make a list of all their debts, across credit cards, store cards, unsecured and secured loans, overdrafts and mortgages. As well as the amounts owed, a person should also note the interest rates and the lender that each debt is with. People should then update this list regularly to keep track of their debts.
Mr Hendry adds that this will also help if people speak to their lenders as they may ask about some of these details so it’s good to be prepared for that conversation.
Once worked out, people can also shop around to find a cheaper loan to switch to. If a person is currently paying interest on loans, credit cards or an overdraft, switching to a cheaper loan could reduce their monthly repayments, making them more manageable.
Mr Hendry added that a person may be able to access a lower interest rate which could lead to a reduction in the overall debt.
The next step is to “not suffer in silence” as missing a monthly payment will only have a negative effect on a person’s credit card rating.
Mr Hendry said: “If you don’t think you can pay speak to your lender straight away, ideally before you miss the payment. You might be able to come to an agreement with your lender that makes your repayments affordable.”
Debt advice charities such as StepChange, Citizens Advice or National Debtline can offer free, impartial advice and guidance to those struggling to manage their debts.
After speaking to a lender and working out what they can pay, Mr Hendry also added that people can possibly roll their multiple outgoings into one with a debt consolidation loan.
This allows a person to pay off all their existing borrowing in one single payment each month, rather than multiple payments on different days.
With debt consolidation, Freedom Finance added: “ It’s worth bearing in mind that if you spread your debts out over a longer term to reduce your monthly repayments, you may end up paying back more in interest overall.
“So, before you proceed, you’ll need to weigh up whether it’s more beneficial to you to pay off your debt quicker and pay less interest, or to make your monthly repayments more manageable by spreading them out over a longer term.”
After doing this, Mr Hendry strongly recommends that people make a monthly spending budget.
He said: “A top tip to avoid overspending and minimising your need to borrow is to create a budget. A budget can help you to visualise all of your outgoings so you can work out where the savings can be made.”
Having a budget can then allow a person to plan their spending on other outgoings such as food, housing payments, and transportation costs.
People can then use “thrifty” hints and tips from experts like Money Saving Expert Martin Lewis and British food writer Jack Monroe to reduce their spending in these areas.
For people who have not got a loan, but believes they may have to in the future, Mr Hendry says that the most important steps now are to improve their credit score and set up a savings account.
He explains: “Your credit score is important, really important as it plays a part in determining the rate you get when you apply for a loan, mortgage, credit card.”
Ways that can improve a person’s credit score include registering to vote and checking to see if your credit report for any errors.
When comparing rates, people should also be wary about sending too many applications to lenders, as this can indicate at a person is struggling for money.
Mr Hendry also recommends that a person set up a savings account as making regular payments into the savings account, even very small ones, signals to a lender that a person is looking after their finances.
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