Get on top of your debt problems
Lewis Woolley, 24, has debts from his university days totalling £5,250. He has overdrafts worth £2,000 with NatWest, £1,600 with RBS and £1,250 with HSBC, and he owes an additional £400 each month to payday loan company Money Shop.
He spoke to Moneywise Debtwizard Mike Thomas for some advice about getting back in the black.
Lewis has been employed full-time since September 2009, earning £24,000 a year. He takes home about £1,600 a month after tax.
After paying his rent, his student loan, transport, bills and food costs, he is left with about £650 a month. £400 of that goes straight to the Money Shop, leaving him with about £250 a month to live on and begin paying off the interest on his overdrafts.
He currently rents a room in south London for £600 each month, inclusive of bills. He is looking to move into a four-bedroom house with friends, which will save him £50 a month.
Lewis's social life is a huge drain on his finances. On a Friday and Saturday night he will spend in excess of £140, or £560 a month.
Also, HSBC is pressuring him to start paying back some of his overdraft; so he is paying in £50 a month only to take it straight back out again.
Lewis's main concern should be reducing his spending. Filling out a budget form that lists his spending against his income will allow him to see how much he has to spend each month after meeting his debt commitments.
The most expensive debt, and the one Lewis needs to address first, is the payday loan. Each month he borrows £400, of which £60 is interest, so he takes home £340.
He pays the £400 back when he's paid, but then returns at the end of the month to borrow another £340.
He should also check the terms and conditions of his overdrafts to reduce the most expensive one first.
Lewis is needlessly spending £100 each month on tube travel, when he could cycle to work for free.
As to his social life, Lewis will have to curtail those nights out to save money. He and his flatmates could consider buying a TV package for around £12 each a month in order to reduce time spent in the pub watching football.
He could also sell some old DVDs and computer games that he no longer uses.
IN A NUTSHELL...
• Avoid payday loans
• Stop drinking for a month to clear the payday loan
• Curtail his socialising to one night a week and sell unwanted items in order to bring his overdrafts down to an interest-free limit of £1,000
• Buy a bike and cycle to work to save £100 a month
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.