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Low-Cost Debt

Interest is an unavoidable aspect of debt.

Understanding interest is the basic ABC of taking a debt. You need to have a proper understanding of the fees you’re paying with a loan.

I have compiled this article which included everything you need to know about low-cost loans.

Let’s dive right in!

Cost Of Debt

There’s a cost attached with everything.  No one will be willing to give up money just for the sake of it. There are relevant costs attached with everything. This is based on a financial concept of the value of a future cash flow. 

If you let go of a cash flow today, you let go of all the investment opportunities that come with it.

Money that is in your hands today is worth more than money that comes tomorrow. Debt collectors use this concept on the basis of which they charge an interest rate on their debt. 

Debt recovery is a risky process. You never know if someone is going to default. There’s always a chance that you won’t get paid back. This is why creditors look for a reliable debtor only when it comes to giving credit. There are relevant payment charges attached as well.

Debt is a big business in the UK. People who have a lot of money offer services which are authorised and regulated by the Financial Conduct Authority. These services conduct business on the basis of the cost attached with debts.

When giving out debts, the additional amount you have to pay in excess of your debt is known as the interest and it is one of the costs of debt. Other costs include premiums for the services from which you take your debts. 

People who conduct business on debts also have ties with relevant debt collection agencies as well. A debt recovery agency is a business specializing in debt recovery. 

There are several debt collectors registered in England that have a grip over payment legislation and specialize in collecting back debts from a debtor. These companies offer debt recovery services.

The UK s leading debt recovery service is the Direct Collection Bailiffs Limited. This company specializes in debt recovery and has the help of a lot of debt collectors who have only one thing on their mind: debt recovery. 

This company is known to be very fast in the debt recovery process. You can check their website for more information. They apply certain debt recovery practices in order to pressurize the debtor into paying back his debts to the creditors.

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Interest Rates

An interest rate is a percentage of your total debt which you have to pay as a cost of the debt taken. Interest is extremely high in England and Wales. You should know this before even taking debts. 

Interest is charged annually. This means that the percentage of the total debt owed is only due once a year. There is no way to avoid interest other than finding a creditor that doesn’t charge interest on the loan he’s given you.

In the UK, debt is very common. Business is conducted on the basis of debt and equity. This makes debtors and creditors very common as well. The UK has made significant efforts for both the parties by passing laws and approving programs to help the country run. 

The government has helped debtors in paying back the money they owe as well as the creditors in the debt collection options. There is a court judgment passed if someone is defaulting on their debts. 

The government also has a lot of programs to cater for the people having cash flow problems.

These programs are sometimes provided by third party companies that help in giving out low cost debts to people with financial problems.

However, the requirements for being a debtor of any such company are pretty strict, and they only offer their service to people with good credit scores. 

There is also an interest rate provided by the state bank on government bonds. This interest rate is the lowest that a business will charge for giving out debt to you. It cannot get lower than this.

Contractual Interest

These are the costs directly attached with your debts. These usually accumulate on a yearly basis as a percentage of the total loan that you’ve taken. This interest is the fees attached with your loan.

You have to pay this interest no matter what. The debtor is also a contractor when he gets into a debt. Not paying any of the attached fees classifies as a breach of contract on behalf of the debtor, and subsequent court proceedings will take place to resolve the issue.

Statutory Interest

This is the fee that the creditor charges you for a late payment of your loan. These charges accumulate on a daily basis according to the amount of days that your payment has been late by.

Once your repayment is late, you have to pay the additional fees of the statutory interest as well otherwise your debt is not considered paid.

Statutory interest is negligible if your payment is late by a few days. This is why it is usually left out from the debt recovery process. 

However, if the payment of your loan is late by a considerable amount of time, then the fees attached will be substantial and these will be accounted for in the debt collection process.

How Do You Calculate Cost Of Debt?

As we mentioned earlier, the cost of debt is expressed as a percentage of the total amount owed to the creditors.

The formula is

A= P( 1+ rt )

Here, 

  • P is the total amount you borrowed from the lender.
  • R is the interest rate divided by 100.
  • A is the amount that is to be paid.
  • T is the number of time periods that have gone by

This rate can be adjusted to 30 days by dividing the rate by 12. If you want the daily interest you have to pay, divide this percentage by 365 to know how much you have to pay.

Low Cost Debt

Long term debt usually has low fees attached to it. Some types of low cost loans are:

Mortgages

A mortgage loan is a type of loan that you take against an immovable asset. The borrower takes the loan for the financing of an asset that he wants to buy. This asset is held in the lender’s name as long as the loan exists and is not paid off.

Once the loan is paid off, the property is transferred to the borrower of the loan. This is usually a long term loan and has a huge amount attached to it. This makes it necessary to attach a low cost to it.

Student Loans

These are loans taken by students to facilitate their experience at college. This loan is to be paid back later along with interest charges that accumulate over the life of the loan. 

However, keep in mind that the money taken from a student loan can only be used to pay for college fees, books, boarding or other costs attached to your studies.

FAQs

Can You Go To Jail For Not Paying Interest?

No, you cannot go to jail for not paying a debt. Your assets might be seized but that also only by a court order. Your creditors cannot even threaten you to take you to jail if you can’t pay your debts.

Show I Pay Off Low Interest Debt?

Yes, all debts are accounted for and court action can be taken for any unpaid debt. It is advised that you make the timely payment for any debts that you owe so you don’t have to potentially experience going to court. 

There are a lot of solutions which are very helpful for a debtor in ending his debt.

Is It Better To Pay Off Debt Or Save Money?

It is best to work out a mix of both. You have to find a balance in paying off your dues and saving additional money. If you increase your debts, you might be paying more in interest payments than the amount that you’re saving.

Make sure that you’re never in such a situation and always have money in the savings account to cover your living expenses.

What Are The Repercussions of Not Paying Back Debt?

If you don’t clear your dues, the creditor can take you to court where the judge can potentially weigh out your assets against the debt you owe. Your assets can then be sold to cover the debt and the additional costs attached to it as well.

However, this is only an extreme case. Normally, the court assigns you a debt management plan or assesses your situation and issues a debt relief order to write some of the owed money off.

Should I Empty My Savings To Pay Off My Credit Card Debt?

If you’re paying off high interest loans, be sure to keep your savings account above the cost of your living expenses. A debtor should never empty his savings account just to pay his debt. Always keep some money there in case of an emergency.

What Debt Is Good Debt?

Good debt is defined as any debt which can increase your wealth and income over time. This kind includes student loans, mortgages and loans taken by businesses. On the other hand, bad loans are those which do nothing towards improving your financial position.

Concluding,

There are different costs a debtor has to pay in order to pay off his dues.

It is best to reserve money for these payments as well and always keep these in mind when earning money.


For more debt advice, keep visiting our website to know more about all the options that are available to you.

Good luck!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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