Being in debt has ramifications that go well beyond money.
You may feel like you’re just moving money from pillar to pillar and not really getting anywhere. In fact, Pillar to Post is the name of a study by the Free Legal Advice Center (FLAC) that examines how debt affects people and what support options are available to help.
CSO figures show that half of all households are struggling to make ends meet, with single parents, the disabled and the unemployed most likely to suffer. This week I’m looking at debt – the good kind and the kind you can find in an endless spiral.
The good news is that help is out there and thankfully far less shame and stigma for accessing it.
A home loan is the prime example of “good” debt. It has an asset that is usually valued higher than the loans and is being sold at low interest rates for a very long period of time.
People worry about “getting the mortgage off” but it’s actually a free loan. With inflation at 9 percent and interest rates at 3 percent, debt naturally pays off quickly even if you just make your regular payments.
The problem arises when you cannot make those repayments. There are some Celtic Tiger legacy debts, but most have returned to service their mortgages or found debt solutions. Arrears were down by 2,071 households before the summer, with just 4.4 percent (31,645) of all domestic mortgages over 90 days in arrears, according to the central bank. About 38 percent have been unpaid for more than five years, and 75 percent of those are now with non-bank service providers (known as vulture funds).
The problem is that these companies are now raising interest rates, which can result in a lot of new debt since these customers can’t switch their loans.
Mortgage debt rarely occurs in isolation, and the bankruptcy service does a really great job of helping those who find themselves in that position. 95 percent of people can stay in their homes.
Help: Contact MABS first and check out backontrack.ie for solutions.
The very definition of “bad” debt because the interest rates are so high. Getting rid of it is key to managing the rest of your arrears since it requires such a large chunk of income to be serviced.
A $4,000 balance at 22 percent APR, repaid with the minimum payment of $100 a month (which is all your bank will ever ask for), would take a paltry six years to pay off. It’s designed that way.
But simply doubling the payment if you can would reduce it to two years, two months. That’s the effect of compounding, and it’s huge.
All debit cards are now Visa/Mastercard enabled 16 digit codes, no need for a separate credit card; even dumping that into an agreed overdraft every now and then where you have to is cheaper.
Help: Pay out more than the minimum every month and cut up the card.
Buy now, pay later
Do you want a new sofa/shoes/fridge? The rise of BNPL products means there’s no marshmallow test – no need to save or even wait until you can afford it.
The problem is twofold: first, while products like Klarna and Humm let you pay back interest-free over three months (which is great), otherwise fees and charges may apply. The second problem is that when we’re offered “easy” payback options that are spread out over time, we’re more apt to buy things we don’t need.
People are optimistic and always believe that something will work out to fix it.
It’s “good” debt as long as you can afford it in the shortest possible time and your circumstances don’t change. Otherwise save and wait.
Help: Pay off the loan in the shortest possible time before interest is added.
Personal contract plans
PCP sells more new cars than any other method.
A Central Bank report (which has only recently started to keep proper statistics) showed the value of the market at €1.4 billion in 2017, with over 76,000 or 79 percent of all car loans sold this way.
Most of us cannot afford to buy a car outright, so a loan is required. PCP has lower interest rates than personal bank loans, so it could be considered “good” debt.
But if you lose your job or can’t afford the repayments, your car can be repossessed, leaving you in debt but without an engine, which can be the worst of both worlds.
At least with a credit union loan, they can’t take the car out of your driveway.
Help: If you paid more than half of the debt, return the car without penalty. See ccpc.ie.
Falling behind with ever-increasing energy bills is a big worry this winter. The regulator has urged all suppliers to take care of vulnerable customers. They also have arrears teams to help with payments and you are welcome to call yours.
Help: Contact your supplier immediately. You need help with your debt.
Christmas surcharges on insurance
We don’t often see good news in the insurance industry, but I like to remind people about extras on their policy, especially when they’re free.
It is valid around the six weeks of Christmas and New Year. For this period, home insurers know we’re more likely to have gifts around – gadgets, new phones, bikes, etc., not to mention the toys stocked by the North Pole.
As such, home insurance policies automatically provide an additional 10 percent coverage for household items just in case you become the unfortunate victim of a theft or burglary. There’s more to replace, and it’s often the expensive new stuff. Who said there wasn’t such a thing as a free mince pie?
While we’re on the subject, it’s also worth checking if your policy includes valuable extras like home assistance (in case you lock yourself out over the holidays), the cost of calling the fire brigade to a chimney fire before Santa has an unfortunate accident or lose the turkey due to a power outage in the freezer. All of that stuff is covered, and since I’m one of the nerds who actually read the terms and conditions, it can often be worth digging up your policy and looking through it. We certainly pay enough for insurance; we should know what we’re getting for it.
One new feature I’ve discovered at Allianz – although others may be doing the same – is acknowledging that many of us are working from home.
You cover the loss of PCs, printers in the home office up to €4,000 under the policy.
“Side hustles” can really pay off
With the cost of living crisis being very real, we are all looking for ways to make more money.
According to a study by Robert Walters Recruitment, almost half of 18 to 24 year olds have a “side job”.
Many of them work full-time “real” jobs but make extra money by doing everything from completing online surveys or influencing social media to selling at a weekend grocery store. Even entry-level postgraduate positions can be poorly paid, so it makes sense.
If you have a passion or talent for something like crocheting, baking, or art, why not see if others are willing to pay for it?
However, don’t forget that in terms of earnings, there is no such thing as “pin money”; All income from work is taxable!
https://www.independent.ie/business/personal-finance/ask-the-expert-good-debt-bad-debt-and-where-to-find-help-42178480.html Ask the Expert: Good Debt, Bad Debt — and Where to Find Help