Personal Loans

Unsecured Debt – How to Deal with It?

Unsecured Debt: Explained

The UK witnessed a steep rise in unsecured debt by almost 11% – close to £80mn a day. This means each household owes an unsecured debt of at least £11000. This has been the sharpest rise in the percentage of unsecured debt in the last 15 years. Of this, credit card debt, car finance, overdrafts, and student debt account for 75% of this increment. Experts are expecting the unsecured debt milestone to exceed £340bn by the end of the decade, meaning each household would owe around £12500 in debt.  The report also revealed some shocking numbers indicating that the younger generation is more into debt as compared to the older ones. Younger people (25-34) hold more than 5 times as much debt as older borrowers aged more than 55. Also, the young generation is 3 times as worried about their ability to repay. As unsecured borrowing has increased rapidly over the years due to advancements in technology in finance, Britain is now facing a crisis of money management.

How does one deal with unsecured debt? Is FinTech to be blamed for the amassed debt? What are the changes we need to bring in our habits of borrowing and managing money? Let us delve deeper to understand how you can deal with debt.

What is unsecured debt?

Unsecured debt is the debt that is formed by using an unsecured form of borrowing. Any loan that you take out without pledging an asset as collateral is an unsecured loan. For example, personal loans are unsecured, credit cards are unsecured form of a loan. So, it can be said that any loan that doesn’t need you to provide any form of security is an unsecured debt.

As it is easily accessible and a person doesn’t have to be a homeowner to borrow such loans – a lot of people rely on this financial product during their rainy days. However, some consequences may impact your financial life if you default on the loan. We will cover that in the subsequent sections.

How is it different from secured debt?

Unsecured debt is different from a secured debt in many ways. One of the major differences between them is – with secured debt, you have to pledge any asset to borrow a loan. While as explained above, an unsecured loan doesn’t need any type of security to be provided.

Secured Debt

Unsecured Debt

Backed by an asset

Isn’t backed by any asset

Lower interest rate

The rate of interest is high

The asset is at stake in case of any default

No risk involved with the asset if you default

May have longer repayment period, up to 35 years

A shorter repayment period may last up to 7 years

So, if you have taken out a secured homeowner loan for 15 years. You are comfortable with the repayment schedule and you have repaid the debt for 8 long years already. However, due to an unforeseen situation, your budget gets disturbed and you can no longer repay the debt on time. After missing a certain number of payments, you may get a call from the lender to understand the reason for non-repayment. And if the situation persists, they may sell your home or asset to recover the money they owe to you.

This will be recorded on your credit record and later you may face challenges when you apply for any financial product.

What if I can’t pay my unsecured debt?

Although unsecured loans are not tied to any asset or collateral, there is something at risk when you default. That is your credit score. The lender doesn’t have any legal rights to repossess your property and sell it off to get the money back. But if you miss a few payments or you stop the repayments completely, your credit score will be impacted.

Always remember that your credit report is the reflection of your financial behavior. It helps the person who is reviewing it understand how well you manage your finances. If you fail to manage your finances properly, lenders or banks will consider you as a risky profile while assessing your loan application.

Also, if you have a bad credit score, lenders may offer you loans that have a high-interest rate. This is because of the risk that is involved. Moreover, the lender may file a legal statement against you and you may receive a County Court Judgement (CCJ).

What happens if I receive a CCJ?

A CCJ is a court order that is registered against a defaulter who has failed to repay the money to the lender or bank. If you pay off the CCJ within 30 days of receiving it in full – it will be removed from your credit report. If you fail to pay off within 30 days of receiving it – then it may stay on your credit report for 6 years. It will impact your plans of getting a mortgage or even a credit card.

5 tips to help you repay your unsecured debt

If you are juggling with debts and trying to find out a way to pay them off fast – you need to take baby steps. Repaying everything you owe back at one go will be a little challenging, so prioritize accordingly. Here are 5 tips that will help you streamline your debt repayment strategy:

1.      Make a budget

A budget is an essential tool for your personal finances. Without a proper budget, there are chances that you may overspend. It helps you track your money and manage it without breaking a sweat. Keep some room in your budget for any unexpected situations so that if something arises, your budget doesn’t get imbalanced.

2.      Pay off the higher interest debts first

There’s a reason behind this. If you pay off the high-interest rates first, you may have to pay less overall. High-interest rate loans accumulate huge amounts leading to a debt trap. So, start paying off the debts that have a high-interest rate. Once that is done, you can start repaying the low-interest debts.

3.      Pick up a side hustle

Earn some extra pounds to expedite the debt repayment process. The more you earn the better it is. You can pick up a freelancing project after your usual 9 to 5 grind and use that money to repay your accumulated debt.

4.      Consolidate your debts

If you have multiple debts and you are struggling to manage each of them – consolidate them. You may borrow a debt consolidation loan to merge all your existing debts into one. That doesn’t mean all your debts will be marked paid off. It simply means rather than paying multiple debts, you can make 1 single repayment against them all. If you find a debt consolidation rate at an interest rate that is lower than all the debts that you have – then you are likely to save some pounds.

5.      Spend less than you earn

This is a life-saving mantra. Always spend less than you earn so that you can save some money towards an emergency fund. Having strong financial support will be beneficial for you in your later life.

In Conclusion…

Despite a high level of debt in the UK, households have paid off a record £7.4bn during the lockdown. As people stopped spending on everything but essentials that led them to repay the accumulated debt on credit cards and personal loans. Borrowing a loan or spending by a credit card is not a wrong financial move. But not planning how you can repay it on time so that the debt doesn’t build up is certainly going to wreck your finances.

Borrow responsibly and prepare a repayment strategy to keep the debt woes at bay.