According to new figures from the Bank of England, consumers are paying off their debts at a record rate.
Concerned about their cashflow in increasingly strained economic times, and keen to take advantage of low interest rates, Brits paid off £377 million more in December than they borrowed – the lowest total net lending for almost 20 years.
In the business world too, people are scrambling to pay off their debts. Many business owners are becoming increasingly concerned about the impact of debt repayments on their cashflow situation, while others simply want to reduce their debts as far as possible before the inevitable interest rate hike.
Should I be paying down my debt?
For many business owners it seems obvious: the priority should be to pay off what you owe. But it is important to remember that this may not be the best strategy in every circumstance.
Here are some factors to consider:
• Debt isn’t always bad. It is important to remember
that credit is there for a reason. Yes, its primary function is
obviously to make money for the banks – but it can also serve an
important purpose for businesses. Credit can help your business grow.
When properly managed, it can enable you to achieve things that you
wouldn’t be able to do with just the cash in your pocket. Provided that
your debt is affordable, and provided it is being used in a productive
way, debt can be a useful tool.
• Are you holding cash reserves? Some small business owners (and many consumers) are considering using their cash reserves to pay off their debts. You should think very carefully about this course of action. With interest rates as low as they are, the likelihood is that you are earning next to nothing on your cash reserves. This can make it seem sensible to use that cash to pay off your debts. But it is important to remember what the cash reserves are there for. Will you need this buffer to tide you over in the event that your revenue falls, or you have an unexpected expenditure? Might you find it difficult to secure further credit to meet requirements of this sort? If so, it may make more sense to hold on to your cash – provided, of course, that your debt repayments are not causing you financial difficulty.
• Keep an eye on the future. Remember, though, that interest rates will not stay this low forever. While commentators are split on the timing of the hike, it is certain that a hike will come. You should try to factor this into your financial forecasts, remembering that your repayments may well increase in the near future. If you are concerned that you will not be able to afford this, you should consider paying down some of your debt.
• Think about negotiation. Finally, remember that lenders are often open to negotiation. If you think you are paying too much for your credit, see if your lender will reduce your rate. If they refuse, shop around to see if you can find a more affordable option.