The Pearson Pension Plan

This page discusses the types of loans available to you and how to manage and ultimately reduce the debt you might have, in the most efficient way.

We have partnered with WEALTH at work to provide a programme of webinars covering a range of topics from pension basics to understanding tax and planning for retirement, as well as wider financial issues. The webinars vary in length, and all have the opportunity for you to ask questions. You will receive an email from the Plan if you are eligible to attend.

Types of loans and interest rates on repayments

Understanding the available options for loans can help you to assess their suitability. For example, borrowing money can be a great option for people looking to buy a home, purchase a car or many other things that may be difficult to pay upfront. However, you should consider all loan options to understand how they will be repaid.

Understanding the interest rates associated with different loans is useful to gauge how much you will be borrowing, how much you will need to repay and to prioritise the loan within your budget. Some examples are explained below.

• Mortgages

  Most people will buy their home with a mortgage. Interest rates for mortgages are usually relatively low and the loan is paid off over a longer term.

  You could save a considerable amount of money by reviewing the cost of your mortgage and the options available to you.

  When you apply for a mortgage, your financial status will be assessed so that the lender can test your ability to repay the loan.

  The lender will look at your ability to make the monthly payments by reviewing your income and outgoings. Some of the documents they will use to do this are: 

  • Your bank statements
  • Childcare costs and future plans
  • Socialising habits
  • Current and future bills

  There are generally three types of mortgage repayment plans that you may be able to apply for:

  • Fixed rate, where you repay at a set interest rate for a period of time.
  • Tracker, your repayments are fixed to an economic factor (such as the Bank of England base rate)
  • Standard variable rate is the default interest rate set by the lender for mortgages. It can change based on fluctuations in the economy.

  Overpaying on your mortgage repayments

  If you can afford to make overpayments on your mortgage each month, this can reduce the overall interest you pay over the life of the loan and the length or term of your mortgage will be shorter.

  For example, if you had a loan of £230,000 over a 25-year term, by paying £100 more a month you would save almost £20,000 in interest payments and have a 3-year shorter term. For more information, we have included a link to MoneyHelper’s guide to mortgages below.

• Credit cards and overdrafts

  Many people use credit cards to help with their finances. You will be required to pay a minimum payment each month, however it will take a considerable amount of time to pay off your balance if you do not make additional payments. If it is possible within your budget, aim to overpay on your monthly direct debit to reduce your balance.

  Below is an example of how overpayments can have a dramatic impact on reducing the amount of interest paid on a total balance of £3,000.00 at 22% APR.

  Monthly repayment	Time to pay a £3,000.00 balance	Total interest paid on top of balance	Cost of the loan including interest
  £60	9 years and 1 month	£3,354	£6,354
  £100	3 years and 6 months	£1,198	£4,198
  £300	1 year and 1 month	£310	£3,310

  Action plan for paying off your credit card

  • Make a plan to pay off your credit card
    By calculating your total income and expenditure, you can work out what is a realistic amount that you can overpayment each month. Make sure you have a direct debit set up to avoid missed payments and ensure you have enough to make at least the minimum repayments.
    
  • Overpayments and prioritising
    It can be difficult to know which debt to prioritise first. It can be tempting to start paying overpayments on your largest debt. However, you should also consider the interest rates on each card. If you have one credit card with £1,000 with a 0% APR and another card with £900 at 30% APR you may wish to prioritise the latter as you could repay your total debt quicker.
    
  • Look into balance transfers
    You might also want to consider a balance transfer if you are able to secure a lower rate, this involves moving your current balance onto a new credit card. This may be a good option too if you want to consolidate multiple balances. Balance transfers usually involve paying a fee, so it is important to read the terms and conditions before you go ahead. To get the most out of a balance transfer you should aim to pay off the total balance in the promotional period.
• Personal Loans

  You may take out a personal loan to pay for purchases like a car or for home improvements. These tend to have higher interest rates than a mortgage and are paid over a shorter term.

• Buy now, pay later

  This option has been around for a while. However, more stores now offer credit that allows you to pay for items within 1-24 months after the purchase. A missed payment can cause interest rates to rise considerably and impact your credit score.

• Short term and pay day loans

  Companies that offer short term or pay day loans have come under a lot of criticism as they offered easy to access credit with very high interest rates. It is important to be sure that you fully understand the costs associated with these loans by reading the terms and conditions carefully as you might end up paying considerably more in interest than the cost of the items purchased. Missed payments can also cause significant financial hardship.

Putting your loan repayments in a budget planner

It is a good idea to put your intended monthly loan repayments into a budget planner. This will reduce the risk of you accidently missing a payment and subsequently impacting your credit score. You can also see all your commitments in one place, allowing you to prioritise overpayments if possible.

If you are considering a loan or have an existing debt, it is always a good idea to have a long-term goal of setting up an emergency fund as it can be huge relief when the unexpected happens.

If you would like more information and tips on how to create a budget planner there is a section dedicated to it on the Information Centre, a link is included below.

Checking your credit score

Checking your credit score from time to time is a great habit. Your credit score can be affected by factors such as your previous credit history, address history, being on the electoral roll and if you have any failed payments.

You can check on your credit score through sites such as Experian, Equifax, and Credit Karma. Checking your credit score on these sites will not have any effect on your score but can also help you to identify any suspicious activity associated with your details.

Where to get help if you are struggling with debt

Debt can have a significant impact on someone’s mental health. If you are struggling and need to speak to someone, we recommend speaking to the Citizens Advice, a link to their site is available below.