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Life after debt

How long after a debt solution should I wait before starting to borrow again?

Posted 07 August 2015 by Shelley Bowers

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So, you've finished your debt solution and you want to know the right time to start borrowing again. Read on for our advice.

Finishing your debt solution – whether it’s a debt management plan, an IVA, Trust Deed or being discharged from bankruptcy – is a great feeling. And you probably told yourself that you’d never borrow and get yourself into debt again. 

So, the first thing we’d advise you to do is make sure you have a little pot of rainy-day money. This could be the money you were previously paying into your debt solution, which you shouldn’t miss too much because you’re already into the habit of it leaving your budget each month. This is simple to do, just open a savings account and when your debt solution comes to an end, set-up a direct transfer from your current account into your savings account when you get paid. This way you shouldn’t miss it too much.

This is the ideal, but not everyone can do this. Sometimes life throws things at you that you don’t expect, which may make it necessary for you to borrow money, even if you don’t really want to.


Not all debt is bad debt

But before we go on, and to stop you from becoming scared of the idea of borrowing, if you’ve had a bad experience in the past – not all borrowing is bad, only unmanageable debt is bad. You can also have debt which you can manage, and there’s nothing wrong with that. If you can make the payments each month and meet all your other financial obligations, like paying your gas and electricity bills and keeping enough aside to pay for food, then there’s no problem. It’s when you’re not able to do those things that it becomes an issue.

So, what should you do if you find yourself in a situation where you need money that you don’t have?

Access your rainy day fund – that’s what it’s for. If, however, you don’t have a fund like this set-up, you’ll need another way to cover the expense. The first port of call should be family and friends. If you have someone who’ll lend you the money, that would be a great way to go as, hopefully, friends and family won’t charge you high interest rates, like other lenders might. And, they may allow you more favourable terms for paying back the borrowed amount, for example, allowing you to take a break from payments if you're left short one month.

But, you also need to keep in mind that the opposite could also be true. If you borrow money from your relatives of friends and you don’t pay it back when you said you would, it could end up souring relationships. Do give it serious thought before you ask family and friends for money.   

And, of course, some people don’t feel comfortable asking friends and family, or maybe they would happily lend it to you, but they simply don’t have the cash available. What do you do in this situation? You may have only one option left – to borrow. So, let’s look at how you should go about this. 

Have I waited long enough after my debt solution ending to think about borrowing again?

There’s no specific time you have to wait. If you believe you can afford the payments on the new borrowing, there’s nothing stopping you applying. Well, nothing except possibly your credit rating that is.  Any damage to your credit rating from when you were struggling with debt, will be the biggest stumbling block to your borrowing again, and this normally stays on your rating for six years. 

Why will my credit report stop me for borrowing again?

Well, because it shows that you’ve previously applied for and been given credit, that you were then unable to pay back, and that you’ve been on a debt solution. And why is this important? Because lenders check your credit report to see if they think you’re a high risk or not. Many only want to lend to those who have good credit reports, showing that you never miss payment or pay late or part payments, because they’ll believe that they’re more likely to get their money back.


Higher rates of interest

As you’ve been on a debt solution, it will show on your credit report that you missed or sent late or part payments to the people who lent you money before. And, if you’re asked if you’ve ever been bankrupt, you will have to answer yes, even if it isn’t still showing on your report. This is called disclosure.

Now this situation doesn’t mean that you’ll necessarily be rejected; some will still lend to you, but only at much higher interest rates than they would offer to other people applying. And there are some companies who specialise in lending only to people who’ve been on debt solutions. So, you could borrow the money, but you’ll end up paying more in interest than you would if your credit report was strong.    

However, if you need the money for an emergency, a new washer for example, you may be willing to accept the higher rate of interest. If you are, that’s fine, as long as you can make the repayments each month without getting yourself into a situation where you are in unmanageable debt again.

To make sure this doesn’t happen, you need to sit down and complete a thorough budget, making sure you that you make a note of all your incomings and outgoings each month. If you’re confident that you can comfortably afford the repayments on the debt, it’s time to borrow again.

Remember that we're always here to help. If you do borrow, and you suddenly find yourself unable to meet the monthly payments, get help and advice immediately so you can avoid getting yourself into the same situation as before. No matter how bad you think your current situation is, there's always a solution.

by Shelley Bowers

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.