04 January 2006

Debt, debt and more debt

I hate the advertisements on television for debt consolidation companies. I don't know what sorts of interest rates they charge, but my main concern is the whole advertising strategy. I think there are a good number of people who don't know what they are getting themselves into and, often, the advertising urges people to engage in financially irresponsible acts.

Rant 1: "Put all your debts together and lower your monthly payments". What the loan company is going to do is to tie you into a loan that lasts a long time - maybe 10 or 20 years. Of course your monthly payments are going to be low over that long a time. But you'll end up paying them a lot more money in total than you would have done otherwise. So, if you can afford it, it's really MUCH better to pay off your debts sooner rather than later. (I'll be happy to demonstrate the maths if anyone is interested.)

Rant 2: "Think of what you could do with the extra money every month"
It's not "extra money" people! Whatever you do, DO NOT run up more debt on your credit cards!! You cannot afford to run up another £500 on your credit card because you think you "can afford" an extra £20/month minimum payment. All you are doing is getting yourself into more debt.

Rant 3: "We were able to pay off our credit card debt and with the extra money we were able to buy a car and take a holiday."
The debt wasn't "paid off" - it was just transferred to another debtor. Very possibly putting your house at risk (was having a mortgage part of what qualified you to get the loan?), and almost certainly at an interest rate that is higher than someone with good credit.

Also, it's not "extra money" - if you borrowed more money than you needed to "pay off" your other debts, you just actually borrowed more money.

Disclaimer: This post does not constitute financial, investment or tax advice. It does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any binding contracts or taking any other financial action.


Anonymous said...

Thank you Pam I share your views on debt, we need to speak out about it. I have recently been reading Affluenza, and decided to alter my lifestyle accordingly.. we have reduced our grocery bill by 25%, and halved our output of rubbish, the western world is obsessed with a more more more attitude lets speak out. I've blogged on living responsibly...

PamBG said...

Thanks for the comment, Sally. It sounds like an interesting book and I'm impressed with the results you have achieved. I totally agree with your views on consumerism (whilst recognising how much I myself am caught up in it).

Conrad said...

I am sure that the UK has rent to own establishments like we do in the USA. These places are renting you the TV or refrigerator and by the time you own it you have paid for it 4 or 5 times. This makes credit card interest rates seem quite low.

I keep telling people to start a TV jar and put what they would pay in rent in the jar each week. Within a few weeks they would be able to pay for it in full.

I am so amazed at how NOW oriented we are. The problem with getting the new gadget NOW is that we may not have enough money ot EAT later.

Thanks for your post.

Conrad said...

Well, I thought posted something, but I think it disappeared. If it doesn't show up, I will try again.

Glad to see your blog Pam!