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What if you can’t pay your bills due to Coronavirus?

We think the country is heading in to period of recession and depression with many people put under financial pressures.

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

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, restaurants etc can afford to trade through an extended period with no customers. And then what happens to all the other businesses in the supply chain?

So Promise Money is encouraging people to consider right now what they might do if there is a risk of their income being significantly reduced?

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

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

Priority commitments for most people 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 to paying the mortgage or rent to keep a roof over our heads, remember to look after the smaller credit commitments, including credit cards and utility bills.

There are two main reasons:

Reason 1

I expect we all hope the effects of the Coronavirus on jobs will 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 which 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 by between 50% and 100% on any new borrowing. Say 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 higher. On an interest only mortgage that could mean the repayments trebling so looking after our credit histories 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 histories.

And don’t think it doesn’t affect you if you are already paying a higher mortgage rate due to other circumstances such as higher LTV, property type, type of income etc. When it comes to borrowing more or moving home these lenders too are likely to charge more if there is poor credit in the background – or 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 its decisions 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% with a CCJ or default under their belt – that’s assuming they can find a lender. 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 your £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 in to 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, should they be needed.

So our advice to borrowers is to prioritise protecting their credit history to keep as many borrowing options open in 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 and 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 main banks are permitting payments 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 so they can help you and hopefully 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, and 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 and 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 and new insurance policies become scarce or more expensive?

Please share this article with family and friends if it may better help them prepare for the fall out of Coronavirus.

For advice on mortgages, homeowner loans and business finance please call 01902 585020 or visit www.promisemoney.co.uk

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2 out of 3 borrowers get a lower rate than our representative example of a regulated secured loan below:

Mortgages and Remortgages

Representative example

£80,000 over 240 months at an APRC OF 4.3% and a discounted variable annual interest rate for two years of 2.12% at £408.99 per month followed by 36 payments of £475.59 and 180 payments of £509.44. The total charge for credit is £39,873 which includes a £995 broker / processing fee and £125 application fee. Total repayable £119,873.

Secured / Second Charge Loans

Representative example

£63,000 over 228 months at an APRC OF 6.1% and an annual interest rate of 5.39% (Fixed for five years – variable thereafter) would be £463.09 per month, total charge for credit is £42,584.52 which includes a £2,690 broker / processing fee. Total repayable £105,584.52.

Unsecured Loans

Representative example

£4,000 over 36 months at an APR OF 49.9% (fixed) and an annual interest rate of 49.9% would be £216.21, total charge for credit is £3,783.56. Total repayable £7,783.56.


THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME

REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.


Written terms available on request. Loans are subject to affordability status and available to UK residents aged 18 or over. Promise Money is a trading style of Promise Solutions Ltd. Promise Solutions is a broker offering products which represent the whole of the specialist second mortgage market and is authorised and regulated by the Financial Conduct Authority – Number 681423.

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