A society of debt

Money can't buy happiness, but it is the only thing that will pay those bills. Having enough money to pay all our bills allows us to provide for our families, plan for the future and enjoy our leisure time.

Not having money restricts our choices and wreaks emotional havoc on our psyche. Borrowing money to pay those bills leads to debt, which can lead to all sorts of problems that have nothing to do with accounting and everything to do with psychology.

Among the negative effects are low self-esteem and impaired cognitive functioning. That means you can't learn, remember, be attentive or solve problems as well when you're freaking out over your electricity bill.

It's rare for someone to never have money problems. Trouble happens, jobs disappear, marriages break, people get sick, houses lose value and bills just keep piling up. No one is immune.

Responding to Debt

Some research found that worrying about debt triggers stress, which reduces your resilience against mental health problems.

Other Studies have shown mental health problems decrease self-control, increase spending and basically distort a person's financial judgment.

But when we say "mental illness" caused by debt the problems are less glaring, but they can still take you to still tie you up in knots.

Behaviour patterns that compel some to spend without restraint can drive a person into debt just as surely as a financial emergency caused by a car crash. Regardless of how someone falls behind, being in debt can trigger unsettling emotional responses.

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Unlike governments, consumers don't have the luxury of endless deficit spending, though many act as if they do. They spend compulsively while ignoring their deteriorating condition. They put off dealing with problems until some outside event - credit denied, legal action, harassing phone calls from debt collectors forces a change.

Some of the symptoms of debt denial are:

  • Underestimating how much you owe
  • Not answering the phone when you suspect a collection agency is calling
  • Leaving bills unopened or just stuffing them in a drawer
  • Opening a new credit card when your old one is maxed out
  • Telling yourself that everyone is in the same situation

Such behaviour just leads to more debt as interest charges and late fees pile up. But ignoring reality is a handy defence mechanism for the brain. The problem is reality always sets in.

Protecting the Consumer

Who controls the credit world and what rules and regulations are in place to protect the public?

Thankfully, the government is cracking down on unscrupulous companies who are making it easy for people to take on too much debt:

New UK Mortgage Rules came into effect on 26th April 2014, designed to make lenders more responsible and included the requirement to complete affordability checks.

The new rules included:

  • A price cap on high cost short-term credit (HCSTC)
  • Limits on how many times a payday loan could roll over
  • Stronger guidance on affordability checks and financial health warnings

In January 2015, a payday loan 'cap' comes into effect

Personal loans and credit agreements are monitored by The Office of Fair Trading and governed by The Consumer Credit Act of 1974. The Act states that loans and other credit agreements must have:

  • Full written details of the true interest rate (the annual percentage rate)
  • A 'cooling-off' period whereby borrowers can change their minds and cancel agreements (set at 14 days)
  • Agreements in writing

Jargon buster

Understanding what you are signing up for is vital so below are some key terms you should fully understand if you are looking to take on a payday loan.

  • APR: The Annual Percentage Rate is the annual rate that is charged for borrowing a certain amount of money. This percentage includes any fees or additional charges associated with processing the loan and is only used to compare secured borrowing
  • Lender: This is quite simply the person, bank, building society, loan company, etc., that is giving a person an amount of money, with the understanding that it will be paid back, usually in instalments with an APR and within an agreed time span
  • Borrower: This is the person who the 'lender' is giving the money to
  • Credit Rating: This is a term used as an evaluation of the credit worthiness of an individual, and an adverse credit rating would indicate that a borrower carries a higher credit risk. A high credit score is an indicator of good credit, whilst a low credit score is a sign of bad credit
  • Credit Reference Agencies: This is an independent agency, which keeps a record of individual's credit history, so lenders can go to these organisations and retrieve credit information on borrowers applying for a loan with them.
  • Debt Consolidation: This is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt but occasionally refers to a country's fiscal approach to corporate debt or Government debt
  • Early Repayment Penalty: Some lenders may charge a fee if you make a repayment too early in your agreed loan term
  • Loan Payment Deferment: Also known as a payment holiday, this is when the lender allows the borrower to have a short break (e.g. a month) before the repayments begin
  • Arrangement fee: An Arrangement Fee (sometimes called a Completion Fee or Booking Fee) is an administration charge made by lenders for arranging credit, usually for a mortgage or for a business loan and sometimes for car finance. Other lenders add the Arrangement Fee to the loan, meaning that you will pay more in interest
  • Personal Loan: Also known as an unsecured loan, these are loans that are provided upon assessment of the individual's credit rating and personal circumstances, usually with higher interest rates and shorter repayment terms
  • Secured Loan: This is money you borrow that is secured against an asset you own, usually your home. The interest rates tend to be cheaper than with unsecured loans, but it can be a much riskier option. Repayment defaulting can result in your home being repossessed by the lender.
  • Representative APR: This is the APR that at least 51% of borrowers will be offered when they take out a loan, but all offers will vary from borrower to borrower and from lender to lender. RAPR is used to compare unsecured borrowing