Heading into a period of recession, financial pressures due to Covid

Jobs are already being hit in the travel and leisure sector as businesses close their doors because of the Coronavirus spike.

But surely this is just the start, as the whole economy will slow down hugely. People will stop spending and will delay making financial decisions. Businesses will be forced to react which could mean reducing staff hours or laying people off. Some businesses may not recover which could lead to redundancies.

Flybe is the obvious example. But, how many pubs, clubs, theatres or restaurants can afford to trade through an extended period with no customers? And what happens to all the other businesses in the supply chain?

What Promise Money is encouraging people to consider right now, is what they might do if there is a risk to their income.

From a financial standpoint, we think there are two key messages to be shared:

KEY MESSAGE 1 – Make a plan to deal with your mortgages and priority commitments first

Priority commitments for most people during the Coronavirus pandemic are likely to be their mortgage, rent, utilities and basic living costs. However, we would include unsecured credit commitments in this too.

Here’s why. It takes years to build up a good credit history and only a small lapse to ruin it. So, whilst it’s important to continue paying your mortgage or rent to keep a roof over our heads, remember to look after the smaller credit commitments. This includes credit cards and utility bills.

There are two main reasons:

Reason 1

The effects of Coronavirus on jobs might be short lived, but for those who fall behind on credit commitments, it could follow them for years, as every missed payment will be recorded on their credit history. In extreme circumstances, they may even get hit with defaults or court judgements. They will stay on their credit file for 5 years. As many lenders use a credit score to support lending decisions, this could result in borrowers being denied credit or paying more for it over a long period of time.

To put that into perspective, slipping from a perfect history to one with a few glitches could increase mortgage interest payments. Even by as much as 50% and 100% on any new borrowing. For example, from 1.6% to over 3%. With recent CCJ’s and arrears, someone who previously qualified for rates of around 2%, could be looking at rates of 5% or even higher. On an interest only mortgage, that could mean the repayments trebling. So, looking after our credit history is important. The same principles apply to secured loans, business finance and commercial mortgages.

At Promise Money we arrange loans and mortgages for people with perfect, damaged and bad credit history.

When it comes to borrowing more or moving home, these lenders are likely to charge more if there is poor credit in the background. Or, even turn down the application altogether.

When it comes to unsecured loans, the increase in interest rates is massive. Mainly, because there is no security. So, a borrower’s credit history is the main thing a lender can base their decision on.

Hold on to your hat, but someone who qualifies for a high street bank unsecured loan at circa 5% to 7% today, could be looking at a typical APR of 50%. The unlucky ones often end up with pay day loans at rates over 1000%.

In the interests of keeping the maths simple, this means where you were paying 6% on a £10,000 loan you would pay around £600 interest in a year. With some mild adverse credit, this could increase to a rate of 50% with interest charges of around £5,000 per year on a £10,000 loan. Payday loans are very short term and this disguises the very high interest rates.

But, if you could get a £10,000 payday loan over a 12 month period, the interest charges at 1,000% per annum would result in interest charges of £100,000. When it’s broken down to borrowing £100 for a week and paying back £120, it doesn’t sound so bad. But, it’s the same rate, and over a year you would pay back £1,000 in interest on borrowings of £100.

Reason 2

By falling into arrears, we all risk having that facility being taken away from us. For example, credit cards could be frozen. This could be an important facility in the future no one wants to lose. By making the minimum payments, it should be possible to keep the facilities open.

Our advice to borrowers is to prioritise protecting their credit history, to keep as many borrowing options open as possible for the future.

Some people’s thoughts may turn to debt management plans, but they need to consider that part of a debt management strategy is to freeze interest payments on credit. This normally shows as detrimental information on the credit file and leads to defaults and CCJ’s.

So, whilst it may help cash flow, the damage to the credit history is done. It will affect any lenders decisions for considerable time to come.

Payday loans may also become a consideration, but with interest rates over 1000% and the fact that other lenders probably wont lend to those with recent payday loans, prudent management of finances should be the referable route to follow.

KEY MESSAGE 2 – Don’t bury your head – talk to your creditors

If you have a mortgage, the banks are permitting payment holidays and a similar level of understanding will filter through to secondary lenders. But don’t assume they know what’s going on in your life.

In the finance industry, there is different way of handling customers who can’t pay, compared to those who won’t pay. If you have a problem, tell your lender; they can help you. Additionally, they would record the matter correctly on your credit file. Otherwise, they will assume the worst.

We encourage you to have that “what if” conversation with yourself now. What if your income was significantly reduced – or nil – for 4 months?

Have a plan. If you can’t replace that income, decide how you will manage your priorities and minimise the impact on you, your family and your credit rating.

Without a plan, many will come to regret the damage they have unwittingly done.

Other actions you could consider

Might now be a good time to consider a consolidation loan? Whilst spreading your repayments over a longer term may cost you more in the long term, it could free up vital cash flow. There are lenders which allow you to make overpayments to pay the loan off sooner when you have spare cash available.

Might now also be a good time to consider income protection insurance? Before jobs and sectors are threatened due to Coronavirus and new insurance policies become scarce or more expensive?

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