STRUGGLING borrowers have been warned to steer clear of illegal loan sharks offering “quick cash fixes” that are likely to make their problems worse.
Many people across the UK have suffered income shocks due to the financial impact of the coronavirus crisis, having been furloughed, seen their pay cut or lost their job.
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But the Local Government Association (LGA) says it is concerned people may wait until they are in severe financial difficulties and debt before they seek help, or could turn to loan sharks instead.
It warns that money lenders operating outside the law may charge sky-high interest rates, rely on extortion, rarely issue paperwork and are likely to plunge people into deeper debt for longer.
In the most extreme cases, loan sharks have been prosecuted for blackmail, violence and kidnap offences, according to the LGA.
Simon Blackburn, chairman of the LGA’s safer and stronger communities board, said: “These illegal loans typically come with astronomical interest rates, soon spiral into uncontrollable debt that can never be repaid, and are typically enforced through intimidation and violence.
IF you're struggling with debt, here are some options you might want to consider
And if you’re unsure what the right option is for you, speak to a free debit advice organisation, such as Citizens Advice.
Debt management plan (DMP)
A DMP is an informal agreement so you can stop it at any time and resume the normal debt repayments, or adjust your payments if your circumstances change, like you lose your job.
It ends when you’ve paid off the debt so it could last for decades.
Many firms charge a fee for the service, either upfront or one that’s incorporated into your monthly payments.
If you’re struggling due to coronavirus, contact your DMP provider so it can liaise with lenders on your behalf.
Debt relief order
If you’re struggling to meet your IPA or IPO repayments, these can be updated if your income changes. You must contact your trustee immediately if this happens.
Equally, if you get a lump sum while you’re paying an IPA or IPO, you may be asked to make a one-off payment from it.
A DRO is way to have your debts written off if you have under £20,000 of debt and no assets.
You have to pay a £90 fee but you don’t have to make repayments and after 12 months your debts are written off.
You can’t apply for a DRO if you’re a homeowner. It will negatively affect your credit score for six years and it may be difficult to get credit during this time and details will be published publically.
Bankruptcy
Bankruptcy is a last resort if there is no other way to repay your debts. It usually lasts a year but it can be up to three years.
A bankruptcy practitioner called a trustee will take control of your assets and sell them to repay your debts.
If you can afford it, the trustee will ask you to make regular payments towards your debts from your income through an income payment agreement (IPA).
If you can’t agree on payment amounts for an IPA, the trustee can apply for an income payment order (IPO). If you don’t meet these payments, the trustee can then apply to extend your bankruptcy.
It is much more difficult to get credit after bankruptcy and your credit rating will be affected by up to six years.
You could lose your house, possessions and some professions won’t let you work if you’ve been made bankrupt.
If you own a business it could be sold and the details of your bankruptcy will be published publically.
You have to pay a £680 fee to go bankrupt.
“There are much better, safer and cheaper ways people can manage their money.”
For those who are struggling, we outline some of the alternatives you could consider.
Many firms are offering payment freezes during the coronavirus crisis to help those with sudden holes in their budgets because of coronavirus.
Of course you still need to make these repayments eventually, and it can mean higher costs in future due to interest racking up, but if you need to ease the pressure on your finances right now it could be a good place to start.
Mortgage providers, for example, are offering up to six-month repayment holidays, while car finance and payday loan providers are offering up to three-month repayment freezes.
Banks have also been encouraged to give up to £500 interest-free overdrafts to existing borrowers and to ensure customers aren’t stung by hefty overdraft interest rates.
IVA firms, meanwhile, are also offering three month payment holidays or a 25 per cent cut in repayments due to coronavirus.
And some lenders may go above and by waiving charges and interest on debts too.
Just bear in mind that while taking out any of this coronavirus help won’t impact your credit score, it may harm your ability to take out credit in future because lenders take into account other factors besides your score.
Firstly, use online calculators, such as these ones from charity Turn2Us, to make sure you’re not missing out on any benefits or grants.
If there’s nothing free you’re entitled to, the next step is to look for the cheapest source of credit.
The LGA says anyone experiencing money problems can contact their local council to find out what help is available.
It says low cost loans may be available from local Community Development Financial Institutions, as well as from credit unions.
Contact your local council and find your nearest credit union to check what products are on offer.
If your credit score is good enough, also consider a 0 per cent credit card which you can use for purchases or to transfer more expensive debts onto.
Just make sure you make the minimum repayments each month and ensure you can clear the debt before the 0 per cent ends and you begin to be charged interest.
MoneySavingExpert’s eligibility calculator will let you know what deals you will likely qualify for.
Mostly importantly, don’t bury your head in the sand. There are free organisations you can turn to, such as:
If you’re seriously struggling with multiple debts they may suggest a debt management plan, an IVA, a debt relief order, or bankruptcy. But don’t commit to any of these without independent advice beforehand.
See our 11 steps for getting out of debt, including the best balance transfer 0 per cent credit cards, for more help.
