Debt: what employees need to know and how employers can help

A benefits package that includes debt advice and support is vital as interest rates continue to rise

Many employers offer employee assistance programmes that include debt management support. This often ranges from budgeting advice to establishing the root cause of the debt issues.

These types of services provide impartial and confidential third-party advice and there are can also contact free services such as MoneyHelper, Citizens Advice or National Debt Line.

WEALTH at work director Jonathan Watts-Lay believes that a better understanding of debt, including via education in the workplace, is vital.

He says: “Debt comes in many forms such as loans, credit cards or store cards. It needs to be carefully planned for and understood before it is undertaken, so it’s never a good idea to borrow on impulse.

“Debt always needs to be carefully managed, as it’s only when repayments become unmanageable or unaffordable that it becomes a problem.”

Balance transfers

Many people use credit cards and there are many different types available for different needs. Common offers include 0% finance on all new purchases. Some money purchase cards allow you to pay off other debts, such as an overdraft, when taking out the card. It’s always a a good idea to transfer any balance from an existing card with a high interest rate to a card with a lower rate.

A purchase using a credit card brings the added benefit of ‘section 75’ protection for purchases over £100 and under £30,000, which means if something goes wrong with your purchase, the credit card company is there to help.

Says Watts-Lay: “Many people may not realise the varying levels of interest that different debt providers charge. Credit cards and overdrafts may have rates as high as 40% and payday loans can have rates of 1,500% and more.

“By shopping around you may be able to move to a lower interest rate and some credit cards even offer 0% on balance transfers. If you have multiple debts, it could also be a good option to consolidate these into a 0% or low-interest balance transfer card, as more money will go towards paying the debt off.”

Sooner = cheaper

When paying off debt, he says, it is usually best to do this as quickly as possible as generally a longer-term loan means more interest payments. For example, a debt of £3,000 with a rate of 18% APR could take 10 years and 10 months to pay off at £50 a month, with a total interest paid of £3,495. If that monthly payment was increased to £100 a month, the debt would be paid off in three years and four months and the interest would be £908.

When you are looking to take out a loan, it can be as important to look at the term of the loan as it is to check the loan’s APR. It is the combination of these that will determine the total interest you will pay.

In some cases, loans with lower APRs may not be as attractive if they tie you into long repayment terms. For example, a £10,000 loan with an APR of 6% that is repaid over 10 years would cost around £3,200 in interest. The same loan with a higher APR of 7% that is repaid over 5 years would cost around £1,800 in interest.

Clearing a loan in a shorter time can reduce interest costs, but monthly payments will be higher. It would be important to consider if you can afford to make these payments before committing to a loan.

Don’t miss a payment

Watts-Lay says: “It is also important to ensure that all debt repayments are made on time. For example, if the minimum payment is not made on a 0% credit card, the 0% offer could be withdrawn for breaching the terms and conditions of the offer, and interest could be charged on the whole of the balance.

“Make sure you speak to your provider if you are unable to make a payment, or forget, as they may be able to look for ways to help.

“Also, ‘buy now pay later’ deals which allow you to spread the cost of items without paying interest if you repay on time can be tempting. However, paying late can mean much higher charges. Terms, interest rates, charges and timescales can vary with these providers and they are not regulated in the UK, so make sure you check the small print.”