The 4 Worst Types of Debt
Not all debts are created equal. Some types of debt, such as a mortgage, have a specific purpose and can even improve your credit score. The worst types of debt are those that make your situation worse, affect your creditworthiness, and keep you under financial stress.
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Here’s a breakdown of the worst types of debt and how they can harm your future.
1. Tax debts
No matter how much debt you have, having money with the government is an absolute no-go. In addition to charging you interest, the government may add penalties to the outstanding amount.
Another reason tax debt is one of the worst types of debt is because HM Revenue and Customs (HMRC) can take enforcement action against you. While creditors cannot take your property if you have credit card or loan debt, HMRC can take money from your income or pension to pay a tax debt. You can also come to your home and take property with you to sell. They can even take you to court or withdraw funds directly from your bank account.
If you have tax debt, pick up the phone and contact HMRC to deal with it before tackling any other debt. If you are struggle financially, HMRC may give you more time to pay or allow you to set up a payment plan.
2. Debt that you have defaulted on
At the top of the worst types of debt are those where you haven’t kept your payments up to date. If you default on a claim it can end up with a debt collection agency, resulting in additional charges and uninterrupted calls from. means Debt collection agencies. Worse, these debts damage your creditworthiness.
If you have such a debt and it has not yet been sent to a collection agency, contact your creditor. You may be able to set up a payment plan to catch up. If the debt has already been turned over to a collection agency, try to negotiate a settlement so you can settle it and rebuild your credit.
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3. Payday loan debts
High-Cost Short-Term Credit (HCSTC) loans like payday loans sometimes have their place. If you are in dire need of cash but have poor credit history, payday loans may be the only option available to you. The problem with these loans is that they only work if you can pay them back on the next payday. Otherwise, their high interest rates and fees make them one of the worst types of debt.
According to the Financial Regulator (FCA), 67% of the people who use payday loans are over-indebted, which means their loan and loan repayments are close to or higher than their real income. This is because the costly short term payday loan cycle is very difficult to break. With interest rates this high, most people keep taking out payday loans at a time just to stay afloat.
You can use the … StepChange calculator to see how much a payday loan costs. For example, if you borrow £ 500 and repay after 30 days, you will typically pay back around £ 620. However, if you are late and repay it after 60 days it increases to £ 758. After 90 days you will be refunded £ 1000 using the same payday loan.
4. Car loan debt
Car loan debts are difficult to categorize. If you really need a car and can’t afford to buy one for cash, a loan is the only option. On the other hand, a £ 15,000 loan for a brand new car is rarely a good idea. This is mainly due to the fact that cars lose their value quickly. So when you’ve paid off the 60 month loan, your car will be worth 40-50% less than if you drove it from the forecourt.
When in doubt, think of it this way: car debt is good if you can afford it and if you can do something positive with a car, such as traveling to a better-paying job. Car debt is bad debt when the car is not really necessary (you are just switching to a more expensive car than your old one was drivable) and when the payments are unaffordable or are seriously breaking your budget.
In general, it makes more sense to buy a used car. If you’re out of cash, you can still rent one that’s only a few years old. You still have a near-new vehicle at a much cheaper price and a loan that you can repay faster.
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