Debt
Is paying off debts one of your long term financial goals?
Paying off debt is a long-term goal for many people. In fact, our research found that 62% of people* say paying off debt is one of their long-term goals. If paying off debt is one of your financial goals, we are here to help you understand debt and empower you to achieve your goal and feel more confident about your finances.
Managing your borrowing
While we may read or see many scary stories in the media, debt can be positive and useful when it’s necessary. And if managed carefully, making sure you don't become over-burdened and that you make all of your monthly repayments, it can be affordable.
Common types of debt are: a mortgage for buying a house; a loan on a car; or using credit cards for larger items or for regular purchases to gain rewards.
Even if you have your debts under control, it's vital to understand what you owe and how much it's costing you. This will help you make sure your borrowing remains affordable and also enable you to identify where you may be able to make savings. All of which can help you feel more in control of your money and help you build your credit profile.
How does debt work?
Simply put, debt is when you borrow money – usually from a bank or a credit provider – under the condition that it must be paid back at a later date, normally with interest. The interest you’ll pay will usually be expressed as a percentage (the Annual Percentage Rate or APR), and this is the cost you pay each year to borrow the money, including any fees or other charges. It’s important to make sure that you can afford to make the repayments, including the interest, before you borrow money.
Different types of debt
Secured debt is money that is secured against an asset you own – so things like your home or your car. Secured loans can be used to borrow larger sums of money (typically more than £10,000).
And because the loan is secured against your assets, the interest rates tend to be lower than what you’d be charged for an unsecured loan. As this type of loan is secured against your assets, if you do not keep up with your repayments, you face losing them – so it can be a riskier option.
Unsecured debts are riskier for lenders, as they have no guarantee of getting their money back. That’s why you’ll tend to pay a higher interest rate for borrowing the money.
With this type of loan, you agree to repay the money you’ve borrowed and any interest in regular installments, until it’s repaid in full. If you are late or miss a repayment altogether, you may incur additional charges and it could damage your credit rating.
Personal loans and credit cards are a common form of unsecured debt. For many people credit card debt isn't a problem, because they pay off the full balance at the end of each month. But if you fail to do so, you could pay over 20% APR a year on the money you borrow – which can add up quickly and have an impact on your disposable income, savings and credit profile.
How to prioritise your payments
It's important to ensure you are meeting all your debt obligations. Knowing which to pay off first can help you save money, clear your debts faster, and help to improve your financial wellbeing.
MoneyHelper, which provides free impartial guidance, breaks debts down into three categories:
- Priority debts - these carry the most serious consequences if you don’t pay them
- Non-priority debts - the consequences of not paying these are less serious
- Debt emergencies - you should get free, independent advice urgently if you’re facing a sudden emergency like court action, bailiff action, disconnection, or eviction.
The Government's free and impartial MoneyHelper service can help you find free debt advice across the UK and help you to prioritise your debts. You can find out more by going to MoneyHelper.org.uk.
Need someone to talk to about your finances?
If you’re struggling with debt, it can be hard to know where to turn. But you don’t need to struggle alone. There are lots of free and confidential advice services available across the UK.
A quick summary on debt
Understand your debts
Understand your debts and list them out by the amount you owe and the interest you are paying.
Prioritise your debts
Ensure you are meeting all the minimum requirements and then prioritise your debts.
Ask for help
Seek help immediately if you are having difficulty with repayments.
Is your financial health as good as it can be?
Get your Fidelity Financial Wellness score in four key areas: budgeting, debt, savings and protection. It only takes a few minutes.
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*The Fidelity Global Sentiment Survey, 2023. The data collection, research and analysis was completed in partnership with Opinium, a strategic insight agency. Data collection took place between 3rd July and 18th July 2023 and includes a sample of 1000 UK adults.