Paying Off Debt: Understanding Your Debts
When it comes to tackling debt, the first step can be the most difficult. After you decide once and for all that it’s time to pay off debt, what do you do next?
Seeking advice is the best course of action in any debt situation. At Don’t Fret About Debt we provide confidential, expert advice on the best way to proceed in paying off debts. This article should give you a head start in understanding your debt.
There are so many different types of debt and each has its own associated jargon – creditors can make it difficult to understand debt, which in turn makes it seem even harder to get rid of! But fear not…
Secured and Unsecured Debts
The likelihood is that you’ve already heard these terms numerous times because these are the most fundamental ways of categorising your debts.
Secured debts are those which have collateral attached. Collateral is something that is pledged as security for repayment of a loan (i.e. a house or a car). In the incident that the loan cannot be repaid, the creditor can seize the property and sell it to recoup the owed amount. An example of a secured debt would be a mortgage.
On the contrary, unsecured debts are those without collateral. These pose more of a risk to creditors as there is no asset attached for security – therefore they have a higher interest rate and can be dangerous if left unpaid. Creditors can sue the borrower for the money owed. A common example of an unsecured debt is an outstanding credit card bill.
This is an important first step in understanding your debts as the possibility of losing your car or house obviously makes a particular kind of debt an extreme priority.
If you’re trying to pay off debts to a number of different creditors, it’s important that you understand the priority of each. Under legal classifications, debt can be categorised into “Priority” and “Non-priority”.
Our team at Don’t Fret About Debt can help guide you to understanding your priority and non-priority debts.
Priority Debts are those which have the most serious consequences attached if they are not paid back on time. With these kinds of debt, court action or loss of collateral is a possibility. Some examples of priority debts are:
- Mortgages and rent
- Secured loans
- Council Tax
- Court Fines
- Utility bills and TV licence
- Income Tax, National Insurance and VAT
- Hire Purchase agreements
As the name suggests, these are debts that should be paid off first.
In comparison, with non-priority debts, the immediate consequences are not quite as serious. However, this doesn’t mean they should be ignored: in the long run, creditors can still take you to court and order bailiffs to visit your home! These kinds of debt are often associated more with credit cards and other unsecured debts. Some examples include:
- Credit and store card debts
- Unsecured personal loans
- Payday loans
- Bank or building society loans
The Next Steps
Hopefully, by this stage, you’ve managed to get your head around the nature of your debt and the importance of each type. Trying to pay off debt to multiple creditors on a variety of dates through the month can be a stressful juggling act, but there are some helpful options.
At Don’t Fret About Debt we can help find the debt solution that works for you and helps you become debt free.
Some schemes such as the Debt Arrangement Scheme can help consolidate your debt into a single monthly payment while also allowing you to freeze or discount fees, interest, penalties and charges as long as you keep up with your monthly debt payments.
You can try our free Debt Calculator today to discover some more simple debt solutions that are tailored to your needs.