Washington Mortgage

The latest ‘Lending to Individuals’ figures from the Bank of England are now out, revealing how much debt people took on in the month of June.

In terms of secured lending (like mortgages), the banks lent out more money in June than they were repaid. We collectively ended the month with £665 million more debt secured against our property.

When it comes to unsecured lending, though, we actually repaid more than we borrowed in June. The ‘net’ figure (amount lent out minus amount repaid) came out at -£98 million, meaning we repaid £98 million more than we borrowed.

Why? In uncertain times, banks are certainly more careful about lending money, but in itself that’s not the full story. Many people are being careful with their money – not just avoiding further borrowing, but trying to repay as much debt as they can.

Overpaying – when there’s enough money

When a borrower can afford it, overpaying their debts is usually an excellent idea – paying more than they have to in a month can bring several benefits. For a start, it simply means they’ll be out of debt sooner. That means they’ll have paid less interest by the time they get there. Plus, carrying a debt is always a potential risk – if their finances take a turn for the worst, it should be a fair bit easier to cope with if they’re not worried about finding money for debt repayments as well as all their other living expenses.

However, it’s important that a borrower doesn’t overpay any one debt if it means they’re not making the minimum payments to their other debts. And they should watch out for the Early Repayment Charges which some debts can impose if they’re repaid earlier than expected.

Debt management – when there’s not enough money

So where does debt management come into this story? Not everyone can afford to overpay their debts – in fact, many people can’t even afford the minimum they’re supposed to pay. This is where a debt management plan can help.

A debt management plan is an agreement between a borrower and their unsecured lenders - if they can’t afford their monthly payments, their lenders may agree to accept smaller payments. In other words, debt management can help them repay their unsecured debt at a rate they can afford.

Lenders aren’t obliged to accept a debt management plan but may well do so if it looks like the best way of getting the debt repaid.

The payments on a debt management plan would be calculated to be affordable without taking up the money the individual needs for their mortgage / rent and other essential costs. So although debt management only deals directly with unsecured debts (and unsecured lenders) it can help a borrower stay on top of all their financial commitments, from food and transport costs to utility bills.

Having said that, debt management isn’t without its downsides. First of all, it can cost more to repay debt more slowly, since the interest will have longer to accrue (although lenders often agree to freeze / reduce interest and charges while someone’s on a debt management plan). It can also affect the borrower’s credit rating, since they’re not keeping up with the repayment agreements they signed up to when they first took on the debt (although their credit rating may already have been damaged).

Nonetheless, debt management can, for many, be a good way of repaying their debt at an affordable rate without taking up the funds they need for their essential living expenses.