Hidden costs associated with debt
June 2008
With so many businesses vying for consumer cash, it’s often easy to be lured by unbelievable offers. Don’t be fooled, though; if someone says they can save you money one way, chances are they’ll have another way to squeeze extra cash from you further down the line.
Armed with knowledge, a willingness to read the small print, and a healthy dose of cynicism, you stand the best chance of getting the best deal – without being tripped up by unexpected costs.
Below are a few examples of hidden costs, and a few words of advice from newtomorrow.com managing director Ian Wright:
Common hidden costs
- Overall cost of consolidation loans:
A consolidation loan may reduce your monthly repayments of £600 to individual creditors, to £400. Cheaper month-to-month, maybe, but that’s £2400 less a year paid off your total debt. More importantly, it’s £2400 more on which you’re being charged interest. Depending on your situation, some lenders will charge more than 40% APR, which will stack up at a frightening pace.
- ‘Free’ credit card balance transfers:
Some credit card companies offer free balance transfers from your existing provider. Be careful, though – once you use your new card you don’t stop paying interest on that transaction, or any others, until you’ve cleared the balance of the original transfer. The secret is to transfer the balance and not use the card. That way you know your payments are reducing your debt.
- Early mortgage repayment:
A lot of people forget that when taking out a new mortgage you don’t just have to think about your new monthly repayment. Say you can no longer afford your mortgage and have to sell your house. If you repay your whole mortgage, some lenders will charge heavy penalties which could total much more than just a few thousand pounds. At best, this will eat into any profit made on the sale; at worst, if you’re already struggling, it could wipe it out completely and leave you owing money.
- Buying a new car
So you’ve haggled a good price for your new pride and joy, and the salesman hands you his pen to sign on the dotted line. Remember that your first payment probably won’t be the one you’ve agreed – most car finance companies will charge an administration fee for the first month, so that £200 repayment can suddenly turn into £350. And if you’re buying a used car, make sure the garage has taxed it before you leave the forecourt.
- Credit card perks
Credit cards are still a very competitive market, and a lot of companies now offer enticing perks such as free flights, discounted fuel or cashback. But do they really offer good value? To offset the cost of supplying these benefits, most credit card lenders will bump up their interest rates, so check. Weigh it up – are you getting 1% cashback on purchases and paying 16% APR on the balance? Unless you settle your balance in full each month, chances are you’re losing money.
- Changing personal details
A lot of companies have now started admin fees for anything and everything. If you change your address on a car insurance policy, for example, prepare to fork out a percentage of your annual premium for administration. We’ve even heard of people accidentally clicking ‘Mrs’ instead of ‘Mr’ when registering their details to book flights online, only to be charged £60 when they try to change it.
- If you change your mind…
… it could cost a packet. Mobile phone companies will often charge a substantial fee to release you from a contract if you want to change provider before the end of your contract. Some gyms will even tie you in for 12 months if you want to avoid premium membership rates, with penalties if you don’t see out the year. So if you move house and need to cancel your gym membership, it could cost you more than your six-pack.
Quotes attributable to Ian Wright, managing director of debt solutions firm newtomorrow.com
“Don’t be fooled into thinking that someone looking for your business has suddenly been overcome by a fit of generosity – if something looks too good to be true, it almost always is. Be cynical and check the small print, otherwise you risk a nasty surprise further down the line.
“You might get a discount on a particular service here or there, but don’t rely on what adverts tell you because what can seem like a great saving can often end up costing you a fortune in other ways. Look beyond great offers, and consider carefully how much money, if any, something is going to save you.
“If debt is the problem and you’re having trouble reducing your monthly outgoings, don’t assume that a consolidation loan offers the best solution. If interest can be frozen and the term of repayment extended, it will be much cheaper. Speak to an independent expert before things get out of hand and get a clear picture of all your options.”