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FOOL'S EYE VIEW
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Although the dynamics of personal finance are often needlessly over-complicated, the basic principles are very simple. We are either: Everything else is pretty much just shuffling money around. Financial services is a cut-throat business, with fierce competition between suppliers, which is often a good thing. However, this ultra-competitive environment has made things horribly complex for us simple punters. In an ideal world, sensible Fools wouldn't borrow any money at all (except for buying a home), but reality always intrudes and we have to learn how best to minimise our debt burden. As Britain slides ever deeper into debt (see The £818bn Debt Gorilla), we need to do everything we can to manage our household budgets sensibly. Essentially, consumer debt is divided into two main areas: mortgages and other loans secured on property, and non-mortgage (unsecured) debt, which the industry calls consumer credit (after the Consumer Credit Act 1974, which regulates lending under £25,000). Let's start by looking at our biggest debt: Mortgages According to the Bank of England, we collectively owed around £686 billion on our mortgages at the end of February. If we assume a typical interest rate of, say, 5.25%, we are paying a mind-boggling £3 billion pounds in interest every month! Note that the base rate is at a 48-year low of 3.75%, yet most mortgage borrowers are paying between 1.5 and 2 percentage points above this, which means fat profits for the lenders. Around half of us are paying the full standard variable rate (SVR), which can be as high as 6%. Ironically, when it comes to mortgage interest rates, size does matter: the biggest lenders are frequently the most expensive! So, if you want to give your household budget a boost (and you're not locked in to a fixed, discounted or capped interest rate), get shopping around for a better mortgage deal. Learn more in: Credit and Store Cards Although mortgages and unsecured debts have both risen dramatically (and are still rising), the problem with consumer credit is its high rates of interest. Typically, credit card companies will charge us around 15% to 20% if we don't pay off our bills in full every single month. 20% is more than five times the base rate, so banks are absolutely creaming it in from unwise borrowers, even after taking bad debts into account. The best way to fight your credit card debt is to switch to a card paying a lower interest rate and pay off as much as you can every payday. Some don't charge any interest at all for a pre-determined period, which is a cracking opportunity for you to give yourself a breather. If you want to get the best out of your cards, treat them as a useful convenience but don't ever borrow money on them at standard rates. They're just too expensive. Learn more in: Personal Loans The mathematically inclined among us will have figured out that £686+£158= £844 billion, our total debt. Note that this figure was £818 billion in November, so we've borrowed an extra £26 billion in three months – eek! If you are one of the unlucky people with more than your fair share of our national debt, don't just struggle under your crippling burden. Visit our Get Out of Debt Centre, where help awaits you. You can also check out the third edition of our UK Investment Guide, which could easily save you its £9.74 cost (which includes a £3.25 discount and free P&P) again and again. Alternatively, Jane Mack and Jasmine Birtles (two fabulous female Fool writers) have written a manual for astute women, A Girl's Best Friend Is Her Money, for the same price.
Outside of the US, the UK mortgage market is probably the most elaborate in the world. This is because, unlike our Continental cousins, we are a nation obsessed by home-owning. Around two-thirds of domestic properties are owner-occupied, and those of us that don't own our homes outright are buying them with mortgages – around 11.5 million of them!
Together, we owe a gigantic £158 billion on our loans and plastic, which is enough to buy more than a million Ferrari 575 Maranellos (which are £157,000 each, according to my local dealership)! By my reckoning, we could all drive one of these beauties for nine days every year but, instead, we've blown our money on food, clothes, DIY, holidays, inferior cars, etc. Shame!
We Brits take out personal loans for a variety of reasons: to consolidate existing debts, pay for cars or holidays and for home improvements. Typically, we'll borrow £5,000 or more over, say, three years and end up paying over a thousand pounds on top in interest. However, the variation in the rates of interest charged by different lenders is shocking. The cheapest lenders charge under 7% APR and the most expensive over 30% APR! So, if you're thinking about arranging a personal loan, shop around and save a packet. Learn more in: