Debt has always been a problem throughout history, and it’s now becoming more problematic than ever. Whether it’s because of the currently unstable economic state, the increasing unemployment rates, their lack of proper financial management, or their bad spending habits, more and more people are incurring debt today.
Before it’s too late, it’s not a bad idea to learn from the experiences of others to avoid falling into the same financial pitfalls.
Declaring Bankruptcy
Bankruptcy is a last-resort option for people who have large debts which they are sure they’ll never be able to pay back any time soon. Depending on your country, you’ll need to follow a certain process to properly declare bankruptcy. For example, if you’re in Canada, you’ll have to locate a trustee in your province to help you finish the proceedings required for declaring bankruptcy.
You can always find out more about this process and its viability if you consult a bankruptcy expert, to stay on the safe side. Usually, this method isn’t recommended unless it’s a last resort because it can put a lot of strain on your credit report; it could take up to 7 years for the mark to be removed from the credit history.
Debt-Inspired Overspending
The concept of debt can sometimes confuse people into thinking that they can spend whatever they want as long as they’re allowed to pay for it later. Sweeping debt under the rug doesn’t really work, especially in this day and age. When you’re purchasing consumables, using debt is basically throwing a burden on your future self. At first, you’ll feel like nothing can stop your shopping spree, with great payment plans provided by your credit card issuer.
Unfortunately, the payments and debt will catch up to you sooner or later. This is going to affect you negatively because you weren’t prepared to take on such huge debt, not to mention that looking back on your purchases, you probably won’t find any items that provide you with long-term satisfaction.
High-Interest Rate Chokehold
Unfortunately, the money you borrow isn’t often the same money you pay back. Interest is the lender’s way of making a profit for every cent they lend someone.
Whether it’s a credit card or a loan, there is always an interest rate that ensures you pay a little bit extra every month for borrowing the money from the lender. The problem with high-interest rates is that they can hold you back from properly paying the loan in time, constantly increasing the amount you owe to the lender.
Not Enjoying your Income
When you’re in debt for a loan or credit, your future income is basically under the pressure of interest rates and payment schedules.
If you think about it, you’ll find that loans or credit card debts are basically money borrowed from your future income. Depending on the type of loan, a percentage of your income will be slashed every month. This percentage can get so high that you’re barely meeting the necessities of life, living paycheck to paycheck.
Losing Your Car or Home
You’ve often heard that the best loans when it comes to interest rates are secured loans. This type of loan is only possible when the borrower submits the title of their car or ownership of their home as collateral. This means that defaulting on the loan will give the bank or lender the right to seize the collateral agreed upon in the contract. Unfortunately, secured loans may seem quite alluring because of the high borrowing cap, but they are still considered a gamble that can cost you too much in the long run.
Lack of Financial Security in Relationships or Families
No one likes to hear this, but the lack of financial security in a relationship or marriage can seriously complicate the relationship. This is mainly caused by the pressure resulting from being unable to cover household expenses. It can even get more complicated if there are children involved; not knowing how you’ll be able to save money for their college education can put you in a real financial pinch.
Low Credit Score
A credit score is a value assigned to a person’s credit situation. To calculate this value, the bank takes into consideration any debts, late payments, penalties, and many other criteria. If your score is low for any reason, you’ll be quite restricted from a financial point of view. The lower your score is, the worse deals and interest rates on any loans you try to get. Securing a mortgage will also become a hassle, possibly preventing you from owning a home. The bad news is that it may take you some time to improve your credit score.
Personal financial crises can have a very deep impact on individuals, especially if it lasts longer than expected. Sadly, there is no shortage of things that you can blame for putting you at risk of reaching these financial situations, but you need to remember that your goal should be avoiding them as much as you can by taking all the precautionary measures possible.
