30% debt interest rate: what happened next
How one family's serious debt problems have rollercoastered their way to a very promising situation.
A little while back I wrote about someone I know in who had been facing the prospect of paying £35,000 interest on a £7,500 loan – and has already paid perhaps £20,000 of it. Check out A 30% debt disaster for the first part of the story.
I advised him to write a budget and start a spending diary as the number one priority. I also said he should make cutbacks and contact one of the great, free debt resources available to us, such as National Debtline or a similar money charity, or a good online discussion board populated by debtors, former debtors and debt experts.
A promising start
It started well when he and his family made some important and necessary cutbacks. This is a huge step. It's hard to give something up when you've got used to it and many don't make it that far until they're forced to when they go bankrupt or have important services cut off.
In between, he also got a significant pay rise. It wasn't enough to fix his situation, but it helps a lot.
However, since then, he has continued to try to hide from his problems and cheat his way out using terrible short cuts. It's a rollercoaster of bad decisions and near-misses, but it ended well with a eureka moment.
He still hasn't written a budget
I have conducted an awful lot of research into debt in my time as a journalist, but I still can't always wrap my head around exactly what many debtors are thinking and feeling.
A case in point is the fact that they have to write a budget. It's obvious, when you haven't been living within your means, despite years of trying, and you're haemorrhaging cash. These debtors claim to accept that they have to write a budget, yet they still don't.
It seems that making a few cutbacks is easier than writing a budget, even though those cutbacks are bound to be swallowed up later by excess in other areas – caused by not having a budget.
Perhaps it's a lack of true understanding or a case of keeping your head in the sand. Maybe it's the over-confident and costly belief that you'll earn your way out eventually. I shan't speculate in detail on the causes of shunning a budget, but if you have had debts that you just can't seem to shift for several years – I'm talking about you. I suggest you read How to spend less and have more.
Classic signs of a problem debtor
More debts were then revealed. It was no surprise, as the weeks passed, when he drip-fed me more vague information showing he had rather more debt than he first stated.
Problem debtors often don't know how many debts they've got or what interest rates they're paying. They don't want to know these things and they don't want to tell anyone about them.
This man has two extra credit cards charging extortionate rates on debts of about £3,500, as well as an £850 overdraft charging daily fees that equate to a truly sickening 40% APR. I'm sure he has more that he hasn't revealed to me.
Contacting a debt charity is another difficult one
One lovemoney.com reader asked why I don't lend him the money to pay off his debts.
There are usually more reasons not to lend money to people who have uncontrollable debts than there are good reasons to do so. In this case, the main reason was that his best solution could be better dealt with through National Debtline, the Consumer Credit Counselling Service or a similar money charity.
This man didn't want to agree with me.
What if we make it all nice and tidy?
Debtors who are not rapidly repaying their loans always want to turn to consolidation loans, as if putting it all into one neat little package is suddenly going to make it go away.
The truth is that consolidating debt is rarely the best choice, as any independent specialist will be able to tell you. A consolidation loan is another route that many debtors try to take in order to avoid what they perceive to be more uncomfortable decisions.
Yet this man tried several times to talk to me about different loans from various banks and building societies, rather than getting advice based on his specific situation.
Then he really turned to the dark side
The debtor's situation wasn't improving.
When I asked him why he hadn't contacted any of the debt resources I pointed him to, I got no answer. Then, out of the blue, I got the message that he had contacted someone. He seemed very pleased with himself.
Unfortunately, he, like many debtors, was lured by a debt “advice” company – complete with a very impartial and professional sounding name – that emphasised consolidation loans.
The company asked none of the important questions and I calculated that it was still going to charge him a horrendous 25% APR and a total of £5,000 interest on his outstanding loan of £7,000.
Problem debtors don't want to budget. They don't want to make cutbacks. They don't want to hurt their pride by asking for specialist help, especially from a charity. They don't want truly independent debt professionals making them feel guilty and telling them to make painful decisions – which is the unfortunate perception that some debtors seem to have of them. And they don't want to talk about their money problems.
They just want a quick fix so that they can keep going. If this sounds familiar – I'm talking about you, and that's regardless of the size of your debts.
A great, big step forward!
I asked why he went to this debt “advice” company and not one of the free, specialist debt charities I mentioned. I didn't get a satisfactory answer, but he must have reflected on it, because a few days later he emailed me with some great news:
Thank you so much for your help.
I have rung the National Debtline and have gone through our family budget. They are referring us to the CCCS for a debt management plan. I am not going to go ahead with [the debt “advice” company] as they are trying to rob/take advantage and cannot guarantee anything. I do however need to change banks as [my bank] is one of my creditors and the lady from the National Debtline was saying that the bank can just take the money from my account.
Awaiting the paper version budget from the National Debtline and will look at what sort of plan would be put in place after we send all of the documents off - also they did say that they would not charge any fees :)
He is now firmly on the path to fixing his problems in the best and cheapest possible way.
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