Introduction - this article provides explores the features, characteristics, pros and cons of the various types of personal and business debt available to consumers and companies...
Credit Cards - a credit card simply another means of borrowing and a method of payment. They can be obtained from any bank, building society and some high street shops. These organisations are known as the 'card issuer'. Once an account has been approved by the credit provider, the cardholder can make purchases at any merchant accepts that particular credit card. Card Issuers will lend money to the consumer and agree an individual a credit limit, which will be the maximum a maximum amount of money that can be spent on the card. The user can then spend this money with an approved merchant. Once the credit limit has been reached, the card will not work any more. Not everyone has a credit card, but they seem to be a cultural necessity in today's modern society. The explosion of e-commerce on the Internet, the introduction of Chip and pin in virtually all retail outlets and the elimination of the old-fashioned check system, is making personal debt credit cards the preferred method of convenient credit. Credit cards are not all bad, they provide the consumer with statutory rights against rogue retailers who fail to deliver goods or goods that have been damaged in transit. They may also provide additional benefits such as free travel insurance & provide additional insurances.
Retail Store Cards - a store card allows the holder to spend an agreed credit limit within a specific shop or chain of shops to obtain personal debt. They have similar characteristics to credit cards, in that there is an interest-free period after which a high interest rate is usually charged. They are popular in most retail chain high street department stores. When a customer is at a checkout in buying mode, the assistant is usually incentivised to offer the customer an application for a store card. Shops use store cards to encourage customer loyalty and convenience shopping, using associated discounting and other incentives. The card is easy-to-use and provide monthly statements to the user. Several investigations by the UK training authorities regarding the astronomical interest rates charged by stores, house provided negative media coverage. Typically busy shoppers would not bother to check the small print after just purchasing an item and signing up for a store card in the actual store. 
Student Loans - on leaving university x-students have on average £16,000 worth of personal debts. Over the next few years it is estimated to rise to a staggering £30,000 worth of debt. Many young people are questioning whether they should even go to university with such a huge commitment at the end of the process. Students are among one of the least experienced groups to manage credit. Their relative inexperience with bank accounts, credit cards and unsecured loans, makes them any ideal group for marketers. Students must pay for shared housing, utility bills, food books and a social life. The £2,800 maintenance grant for low income families does not always cover these sorts of costs. In the UK, student loans are obtained from the Student Loans Company which is a public sector organisation, created to provide loans to one million students per year. The organisation administers the collection of repayments from its student borrowers. The loan is made up of a tuition fee and a maintenance loan, payable at the beginning of each academic term. 75% of the loan is paid to everybody, regardless of income and the remaining 25% is based on an income assessment. The amount of income the students family earns, dictates the level of loan available. The loans interest rate is that of the inflation rate. Once the student leaves university, they will not repay the loan until they earn over £15,000 per annum. The repayments are then deducted using the tax system. This process has become known as the income contingent repayment. The typical repayment profile is between 15 and 20 years. This means that students considering entering higher education will have to consider very seriously their attitude towards debt management in the future. Interest is not applied to the loan during university time and so it has become known as an 'interest-free' loan. However, this is not the case, as the interest from the University course time is simply added to the total debt in later years.
Personal Unsecured Loan - unsecured loans do not require any assets or collateral to obtain the personal debt. Most unsecured loans are up to £25,000 and organised so that the debtor repays in monthly fixed instalments. Unsecured loans are typically used to make home improvements, pay for holidays by a new car or consolidate personal loans or credit cards. it is one of the most common forms of debt in the UK, provided by hundreds of different financial institutions. These institutions risk losing the money owed to them if the debtor fails to repay the loan. This means that the interest rate will typically be higher than secured loans due to the fact that there is a higher risk of bad debt. Unsecured loans may be obtained from high street branch, the Internet or over the phone in minutes. The credit checking process is a necessary part of the application to ensure an individual's creditworthiness. The term of the loan is typically one to five years depending on the individual's preferences.
Personal Secured Loans - a secured loan is a means of raising cash using a security of an individual's home as collateral. The market value of most properties in the UK far exceeds the average secured loan. Therefore, the lender has a reasonable degree of confidence that their money will be repaid. Failure to keep up repayments on a secured loan could result in the policyholder's home being repossessed by the lender. During the application process, the lender also assesses and individual's employment circumstances and credit record to ensure they are credit worthy, trustworthy and the type of individual that is less likely to default on repayments. Income is also assessed as a means to calculate the level of disposable income which could be used to repay the secured loan.
Hire Purchase - consumers usually accumulate hire purchase personal debt when purchasing larger items from retail stores, such as furniture or cars. In layman's terms, the consumer hires the goods for the duration of the agreement, upon which they will purchase and own the goods, once the debt is paid off at the end of the term. Ownership of the goods remains the property of the creditor until the debt is repaid. This means that the borrower may not sell the goods belonging to the creditor. Failure to keep up repayments on a hire purchase agreement may result in the creditor demanding the return of the products. If more than one third of the debt has been repaid, the creditor must apply to a county court before repossession could take place. If the consumer has paid less than one third of the total personal debt, the creditor has the rights to repossess under certain situations... as cars are located on a public highway and not within the borrower's private residence, the creditor has the right to repossess the car, (assuming they are within their rights under the terms of the hire purchase agreement). For a hire purchase creditor to repossess goods stored inside a person's private dwelling, they would need a county court order.
Residential Mortgages - a mortgage is a form of loan which helps people buy property. Most people in the United Kingdom require a mortgage to be able to afford a home. Mortgages can be obtained from banks, building societies, mortgage brokers and other specialist lenders. A mortgage is usually a long-term loan of 20 to 25 years and the repayment of it is usually based on an interest only basis or repayment basis. Under a repayment mortgage the policyholder repays small elements of the capital as well as interest until the entire debt is repaid at the end of the term. With an interest only mortgage, the repayments are literally the calculation of the interest on the capital sum. It assumes that the mortgage holder is investing in some sort of parallel endowment or pension plan which would aim to repay the capital at the end of the term. The interest rate from major lenders uses the Bank of England is published base rate as a basis. Mortgages have additional features to assist individuals in different circumstances. For instance borrowers may choose a fixed interest rate or a variable interest rate. Alternatively a capped rate of interest would allow aim mortgage holder to limit their exposure to interest rate rises in future. In the United Kingdom, there is an enormous amount of mortgage debt as UK residents have borrowed over many times over their average income. This has created the spectre of negative equity, where falling house prices mean individuals with mortgage debts that exceed the value of their homes.
Mortgage Arrears- mortgage arrears occurs when a policyholder fails to keep up with their regular mortgage payments. Failure to repay a mortgage each month has serious consequences as a policyholders home may be at risk if they fail keep up repayments. In practice, lender may expect policyholders to contact them as soon as it becomes obvious that the policyholder may find it difficult to meet imminent mortgage repayments. Sympathetic lenders may allow a policyholder to have a short payment holiday, depending on the payment history of the individual concerned. Other options and may include extending the overall term of the mortgage by a few years in order to reduce the monthly payments in the short-term. It is critical that contact with the lender be made, as soon as possible to alert the lender of the possibility of mortgage arrears occurring. The Financial Services Authority website can provide some useful tips on how to deal with mortgage arrears.
Inland Revenue Corporation Tax Bills - every year individuals fail to accurately calculate their tax bill through the self assessment system. This can lead to the form being rejected and possibly a penalty fine for late submission. In addition, large changes in the pattern of in individual's income may prompt the Inland Revenue to investigate and individual's self-assessment claim. It may be that the change in individual circumstances was perfectly valid. In situations where tax owed to the government has been is underpaid, the Inland Revenue is one of the most important priority creditors to be settled. It is critical that any investigation or clarification of any potential irregularities is dealt with swiftly. Most investigations would be handled by a named person within the Inland Revenue and it is very important to make contact with this person to answer any questions they may have, or provide information required. The Inland Revenue has the statutory power to summons an individual to a magistrate's court for smaller personal debts. Alternatively, for very serious breaches of outstanding tax, there are fines and even custodial sentences, implemented via the county court process.
Rental Property Arrears - rent arrears represents an unpaid 'priority debt' from a rental property. In the UK, the rental sector is booming due to historically high house prices and first-time buyers shying away from a falling housing market. Many cannot afford to buy a home, or are choosing to rent instead. Many first-time renters are not always knowledgeable about the implications of failing to meet rental payments. Tenants who failed to pay their rent, risk being evicted by the landlord. Failure to pay rent arrears may also impact upon a tenants credit history report, which tracks any formal proceedings in relation to personal debt. Landlords have rights and responsibilities which are set out by statute. Most tenants agree to sign a short hold tenancy agreement, outlining their own rights and responsibilities, in conjunction with the landlord. These tenancy agreements differ depending upon the nature of the let and individual circumstances. If the tenant cannot afford to pay their rent, it is advisable to contact the landlord at the earliest possible opportunity to make them aware of the situation. In certain situations, talents that rely on housing benefits to be paid many have cash flow problems due to council administrative delays. Councils are notoriously bureaucratic and slow in implementing systems, paperwork and claims. By providing copies of correspondence with the council, goodwill may be created and the landlord may be sympathetic and understanding. There are other benefits for lower income individuals which the government has introduced, such as the discretionary housing payment. In addition the council tax benefit may qualify to lower income tenants.
Household Utility Bills - outstanding household bills can create personal debt. The massive increase in the household price of gas, electricity and water has taken many by surprise. Despite the introduction of minimal competition and the ability to switch between suppliers by comparing prices using the Internet, the general market for utilities is becoming more and more expensive for UK residents. Everybody needs heat is light and water and there is very little consumers can do apart from becoming more energy efficient in their home and compare the best supplier in terms of price. Many groups in society such as pensioners, students and low income families cannot afford to pay mounting household utility bills. As their incomes remain low and remain fixed, while the price of utilities rises at a variable rate in proportion to people's incomes. Utility companies have statutory powers to enforce debt collection which can become intimidating for many people. This includes forcing consumers with outstanding debts to install prepaid style meters, (which have been recently criticised as being more expensive than a direct debit approach). The utility industry invests billions of pounds in infrastructure and has a number of active programs to encourage home energy efficiency and cost saving.
Overdrafts - the main type of short-term bank funding is overdraft which is usually secured based on the assets of the company. An overdraft facility is commonly used when companies have a long cash flows in and out of business. For instance, the need to purchase raw material in order to produce a product which could be sold on for profit. Some strategic suppliers may need paying settlements in their own currency which can easily arrange with a bank.
Unsecured Bank Loans - nine out of ten small business firms use banks to raise finance. Banks are looking for the security of a company asset, so they have relative certainty that they will receive their money back at the end of the period. Banks will charge interest rate that reflects the conditions of the current market and also the level of risk attached to the proposal. Banks also look at the range of factors related to the borrower themselves, when evaluating loan requests. These include the character of individual (in terms of their credit history and whether or not they have a history with the bank itself). Banks also look at the capacity in other words the borrower's ability to repay a loan based on the business plan. They also look of the collateral of a borrower to see if the asset proposed is worth in excess of the loan. Banks also look at the capital to see whether or not the assets exceed the debts.
Secured Loans - a secured loan is usually secured over an asset of a company such as buildings or land. Providers of capital who of secured loans want to ensure their order of repayment is high. Charges secured over assets are usually defined as fixed charges or floating charges. Fixed charges are highly specific such as land, property and buildings. Floating charges are attached to "shifting fund assets” such as stock. If a company defaults on its loan repayments, it may cause the floating charge to “crystallise" and become a fixed charge.
Commercial Mortgages -the credit crunch has made obtaining commercial lending very difficult indeed, as commercial property prices in the UK have plummeted. Refinancing also includes the remortgaging of commercial property. In the past, many business owners have been into this option, during a record period of property price growth and easily obtained mortgage credit. However, the prospect of negative equity (where a building or asset has reduced in value to that of less than the loan secured against it), is now a very real issue in the current business climate.
Bridging Loans - bridging loans provide a short-term means of borrowing large sums of capital, for one-off purchases such as a buildings, commercial property and land. Most bridging loan is secured on a proportion of the fixed asset the loan is intended to finance. This proportion is usually between 85% and 100% of the market value. There are various types of bridging loans including bridging loans designed to:-
- Facilitate purchases of properties at auction. The buyer usually has 28 days to provide the full sum, following a successful bid;
- Finance the redevelopment cost associated with converting a commercial property into a residential premises, or vice versa;
- Help self build property developers between the time they purchase the land and need to pay for materials and labour to build a property, which rental returns can be achieved;
- Assist buyers and sellers stuck in UK property 'chains', who want to escape the dependency upon the next link in the chain.