It’s rare that my jaw drops when receiving a question, but this one on the back of my News of the World column did just that. It wasn’t the question itself, but the moment I knocked the numbers into my calculator and realized the true impact…
I wrote the Q&A below for my page in the paper, but due to space shortage they were both cut down, so I thought I’d publish it in full here (it follows on well from my more worried about 10% interest than 2,000% APR blog).
“Q. A year ago we got a secured loan as my husband’s business had financial difficulties. Things are now better but we’ve a nearly £20,000 debt that’ll take over 20 years to pay off (we’re paying £400/mth). We have really poor credit ratings, but is there anything we can do? K. E. By email”
A. Your email made me very angry. You’re being ROBBED – £400 a month for 20 years is £96,000 repaid, that’s a cost of £76,000 (equiv to 24% interest). Frustratingly, your lender’s now closed to new business so naming and shaming wouldn’t help.
Everyone must heed this warning – secured loans are usually hellish. While ‘secured’ SOUNDS good, it’s the lender who gets the security of being able to TAKE YOUR HOME. Worse, the rate isn’t fixed so it doesn’t matter what you borrowed at. The costs can and do jump horrendously, with interest rates doubling for some.
I’ve racked my brain for solutions, your bad credit score means no one is likely to give you that volume of debt much cheaper. These are the best options I can think of:
- Overpay. If, as you say, your finances are better, see if you can repay more off so less interest compounds. If you repay £600 – not £400 – a month, then you’d clear the debt in less than six years, saving an astonishing £64,000 of interest. Going through your full finances to see where you can save on other things could help free up even more spare cash.
(For a good example of how this works use the ultimate mortgage calculator).
- Switch it to your mortgage. You must be a homeowner to have a secured loan, so either now, or in the future if possible, borrow via your mortgage to clear this debt. Add it to even a costly 7% mortgage, and then pay your £400/month to that and you’d clear this same debt in six years at an interest cost of just £4,000.
- Reclaim PPI. I suspect almost certainly some of that cost is to pay for loan insurance. Many of those policies have been missold so you may be able to reclaim, even if not you should be able to ditch and switch to a cheaper provider, I’ve known people save £10,000s doing that (see the PPI reclaiming guide).
- Talk to a debt counsellor. This rate is unforgiveable and shouldn’t be allowed. I would go and see a free non-profit debt counsellor to go through the paperwork and see whether something like an IVA could help (see the debt help guide for full info).
If only this type of scandal were actually a rare event. I’d welcome any more thoughts or suggestions on things the questionner could do.