About time. I was taught Pythagoras’s theorem (something I think I’ve used once in my life: when working out the size of a widescreen TV!) and the atomic weight of elements (nope, can’t say I’ve ever used that), but for some reason compound interest and budgeting was never deemed important enough to mention.
I am fortunate in that I come from a family that was always careful with money - I still remember getting banished from the dining room once a month so my Father could spread out all his receipts to work out where the money went; we used to have lengthy investigations if he couldn’t account for even a few pence! For those where money was less tight or whose parents were less careful, budgeting is not something that will necessarily come naturally.
The only people who will lose out from this are those offering financial products that are poor value for money, store cards and ‘premium’ current accounts for example. If they only taught one lesson it would be worthwhile - if your outgoings regularly equal or exceed your income you will, sooner or later, get into difficulty; do something about it now, not when it happens.
They sound great - transfer all your existing loans and credit cards to a debt consolidation loan, only deal with one creditor and, because the loan is payed off over a longer period, the monthly payments are lower. Right? Yes, in theory, but the reality can be very different.
Suddenly you find yourself with cards that have credit available, banks willing to lend you money. After all, your debt consolidation loan has brought your monthly payments down. Of course, to start with you tell yourself you’re going to be careful, you’re not going to take on any more debt. But then your car needs repairing, or you feel that you deserve a holiday, and before you know it your cards are maxed out again and you’re back where you started. Only this time it’s worse: your debt consolidation has a charge on your house, so if you can’t pay it the lender can force the sale of your home.
An article in the Telegraph warns that taking out a debt consolidation loan can often signal the start of serious financial problems:
According to the Consumer Credit Counselling Service charity, debt consolidation loans only benefit a minority. In an analysis of thousands of people who had taken out these loans, it said 97 per cent would have been better off by taking alternative action.
It is very hard to think of any circumstance where a debt consolidation loan is a good idea, unless as an absolute last resort, and even then only if you are very disciplined. If you are having difficulty paying unsecured debts there are other mechanisms in place to help, IVAs for example.
An example in today’s Observer also gives an example of how expensive these types of loans are in the long term:
A personal unsecured loan of £15,000 will cost £300 a month over five years, compared with £100 a month if consolidated into a mortgage. But over 25 years this spirals to more than £33,000, compared with £17,500 payable on the loan.
With interest rates on the rise, many more people will be finding themselves in financial difficulty, with loans and credit cards they cannot afford to pay. If you are one of them, think very carefully before taking on a debt consolidation loan, and consider all options.
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