How to avoid debt sneaking up on you

Author: Brian Weaver

There are two main ways in which people fall into debt in which they struggle to pay off. The most obvious way is by taking out large loans, perhaps for tuition fees or for a mortgage. However, many people often overlook the smaller, more frequent ways in which they loan money and these can often sneak up on people – particularly when there are high interest rates associated. Here are our tips on how to avoid such debt sneaking up on you.

Car finance

The number of people borrowing to buy new cars, spending next to nothing up front, is rising rapidly. More than 85 per cent of new cars in the UK are bought through loans, up from just over 50 per cent in 2009. The number of new cars registered was 30 per cent higher in 2016 than in 2012, thanks mainly to personal contract purchase (PCP) agreements.

PCPs require a deposit, usually about 10 per cent of the car’s price. You then borrow an amount based on how much value the car will lose over the term of your deal, usually 24 to 36 months, plus interest of 4 to 7 per cent. If you want to keep the car at the end of the deal, you pay a “balloon payment” or Guaranteed Minimum Future Value, which is agreed at the start of your loan.

Despite weak wage growth, consumers continue to rack up debt

Be wary of any deals that claim to be “0 per cent”, because even if the interest is that low, other parts of the deal, such as the balloon payment, will be more expensive. Also think twice about the finance rates offered by dealerships.

Ben Smith, the co-founder of, a marketplace for second-hand cars, says he was shocked when a sales rep from a high street bank, which has a car finance division, explained there was a “sell-in rate” for loans, of say 5 per cent. After that point motor dealers are free to set the rates themselves, and receive a chunk back in commission. “The gentleman at the bank showed me that if you sell finance at 12.5 per cent you can make a £1,000 margin on a car. I am surprised that this practice is still allowed,” he says.

Personal loan rates are always better than the rates offered on car finance. This month is launching a deal in which car buyers can borrow from Zopa, a peer-to-peer lending company, at competitive rates.

Credit cards

Interest rates may be at record lows, but credit card companies do not appear to have noticed — the average credit card APR is about 22.6 per cent.

The Bank of England has expressed concern about introductory deals with zero interest rates. These are getting ever more generous.

“Borrowers could be lulled into a false sense of security by picking a long interest-free credit card and not paying more than the minimum repayment each month,” says Rachel Springall of Moneyfacts, the consumer site. “It’s vital that card customers make a plan to tackle the balance during the interest-free period. Customers also need to be careful of a rise to their credit card limit because this may be a temptation to spend more.”

The longest 0 per cent balance transfer card is from MBNA, at 41 months, but there’s a transfer fee of 2.79 per cent. Halifax has a 40-month 0 per cent balance transfer card with a 1.69 per cent fee. The best 0 per cent purchase card is the Dual Credit MasterCard from AA, which is interest-free for 32 months.


Unauthorised overdrafts can be one of the most expensive ways to borrow cash. Halifax, for example, charges £5 a day on its Reward Current Account if you dip into the red. Most banks offer mobile apps or free text alerts to help you to manage your outgoings. If you are regularly going overdrawn, hunt for a bank with the best interest-free facilities. First Direct gives you a £250 overdraft without charge, thereafter you pay 15.9 per cent equivalent annual rate (EAR), or 1.24 per cent a month. M&S Bank, Post Office Money and Ulster Bank also offer generous interest-free overdraft deals.

Mobile phone deals

Moneysavingexpert compared the six biggest phone companies and found that their contract deals were far more expensive than buying a handset upfront and getting a sim-only package. For example, a 16GB iPhone 6S or a Samsung Galaxy S7 as part of a two-year contract worked out 4.7 per cent to 34 per cent more expensive than buying it outright.

These 4 mechanisms of accumulating debt are the most common, but by no means the only ways in which debt can sneak up on you. We strongly advise each individual to assess their own financial situation and work out exactly where such debt is originating. It always is important to be aware of interest rates associated with different types of loans and to seek professional advice when you feel overwhelmed.