What is the debt spiral, how to get out of it and how to avoid it? We will try to answer these questions in this article.
Literally anyone can fall into the debt spiral, regardless of our earnings. The desire to buy a car, expensive trip or even new furniture prompts us to take a loan. Later, however, a simple case of fate is enough, such as illness and we are forced to borrow again. Similar situations are a straight path to the debt spiral.
What is a debt spiral?
We are dealing with a spiral of debt when new financial arrears accumulate on our account and we are unable to pay our liabilities on time. The spiral is created when we want to pay back the arrears resulting from non-payment of installments of an earlier loan. Finally, we come to the point where no company wants to lend us money and our debts are rising inexorably. All this inevitably leads to a crisis.
What does loan default lead to?
The first consequence associated with non-payment of loan installments is the inability to incur another debt. Banks and financial institutions are afraid of unreliable clients who do not pay their financial liabilities. By taking such a high risk and lending money to insecure people, they run the risk of losing money and the resulting interest. Therefore, if it is our responsibility to pay back several loans and we are unable to pay them back, we can be sure that no company will grant us a loan. This situation will change only when we regain financial liquidity again.
Long-term defaults on loan installments are usually associated with debt collection proceedings. First of all, banks and loan companies carry out internal debt collection, which usually consists of sending reminders and SMSs reminding about debt. As a last resort, an employee of the institution contacts us by phone regarding debt.
If the above methods do not bring the expected result, i.e. we do not settle the debt, we can count on external debt collection proceedings. This means that the lender transfers the debt case to an external company that specializes in debt recovery. It is worth mentioning here that each debt collection procedure involves additional costs that are borne by the borrower. You can read about the prompt costs in our entry Prompt – what is it and how much does the debtor cost?
The last way to recover debt is bailiff proceedings. Probably everyone knows what the bailiff’s actions are – he can take our property, mobility, which will be auctioned off and the money obtained in this way will cover our debt. Of course, no one wants to have contact with the bailiff, so it is worth seeing the first signals that we are not dealing with debts, think about how we could get out of them.
How to deal with debts?
We must always remember that accumulating debts are not a reason to panic, and you can get out of any difficult situation. We should also take into account the sacrifices that await us – for most of us they can be very difficult, but only they will bring us closer to a stable financial situation.
First of all, we should analyze our financial problems, indicate which obligations we need to settle as soon as possible, and at the same time we should assess the possibilities of our budget.
Let’s try to spend at least 1/3 of our income on repayment of debts in banks and loan companies. Divide the remaining money into expenses for current consumption and the necessary housing charges, etc.
We must absolutely forget about spending money on items that are unnecessary for us. We do not need a new microwave if the one we have is functional, but older. Let’s also give up buying expensive foods, and instead we can choose cheaper substitutes of equally high quality.
Let’s look for savings, not only in current expenses on food products, but also try to reduce our bills. Let’s try to use less energy, water, gas – it may seem that we will save only a few zlotys a month, but over the year we accumulate a more specific amount, and at the same time we will get rid of bad habits such as leaving the lights on everywhere.
If we are forced to take a loan, we should choose a company that has an established position on the market and which does not charge horrendously high interest. Such a company is Captain Paul Persian , which offers borrowers favorable offers of long-term loans with clear rules on interest and repayment obligations.
How to avoid a debt spiral?
If we are in a group of lucky people who have not yet reached the debt spiral, it is worth knowing how to protect against it.
First of all, we should have a budget that will help us organize our finances and determine for what purpose we can save money. When planning your budget, always try to be “in the plus”. Let’s prepare a statement of expenses and revenues, and if there is a surplus amount left – treat it as savings.
The savings mentioned above are important because we often fall into a spiral of debt due to unforeseen situations like the aforementioned disease. Thanks to the accumulated amount for a “rainy day” we provide ourselves with the so-called financial cushion.
Savings can save us in an unforeseen situation, but let’s not assume in advance that they will be spent on such a purpose. We should assume that we save for something that we really want, i.e. a new car, trip, etc. Setting a goal will motivate us to put aside a certain amount monthly.
Even if we experience a spiral of debt, we do not have to be afraid, because by watching our own budget and setting priorities we can get out of any debt. The same can be said about debt avoidance – only regularity and a specific plan will ensure that we can always boast of financial liquidity.