DEBT CRISIS – The current debt crisis impacts both savers and borrowers

Recent reports claim that the recent recession has radically altered public attitudes towards debt and indicates that people are now reluctant to run up large bills on credit cards.

If attitudes really have changed that would be welcome. For years the public have been persuaded to believe that debt is good, however that is not the case as credit or debt reduces your net worth, so is it really a good idea to get into debt?

That depends on whether you are raising good debt or bad debt.

There is a difference between buying consumer items such as expensive holidays and clothes and additional non essential items for your house (“Bad Debt”. Although we are persuaded by advertising hype that this type of spending will improve our standard of living, debt of this kind actually reduces our wealth over the years ahead as we are spending out of current income to service our debt.

However if we increase debt to purchase an income producing asset, the income of which exceeds the servicing payment of the debt, then over time we should improve our overall wealth. That is “Good Debt.

The debt crisis has caused the Bank of England to maintain low interest rates.

So whilst this is useful people with good debt, as they will have improved the gap between the income they receive and the serving payments of the “good” debt. It has not helped savers and has reduced the standard of living for many dependent on their savings for income. With typically derisory saving returns on offer, are their alternatives ways of getting an income?

(1)    If you own a home you could consider letting a room as the first £4500 of income is tax free.

(2)    You might consider Permanent Interest Bearing shares in building societies, as some of these are offering very useful yields of between 6.5% and 11.2% – however do take advice as there are some risks attached.

(3)    As you are aware in order to repair their balance sheets banks are offering virtually zero returns to many depositors but charging significantly higher amounts of interest to borrowers. So why not cut out the banks and set yourself up as a lender and obtain wholesale returns on your money. You can do so via a web site called ZOPA this allows you to lend money directly to borrowers and obtain returns of between 7% to 11.5%. The borrowers are graded and you can choose who you want to lend to, for how long, and how much you want to lend. You pay a 1% per annum charge to the site as a facilitation fee. Once again check this out very carefully and if you do decide that this is for you, spread your monies between different grades of borrower and test the waters first with small amounts.

If you need help with your finances and would like Professional Financial Planning, contact one of our Financial Planning Consultants to find out how we can help you.

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