When debt turns from a way to get ahead in life to a burden that ruins life, one must take stock and find out why it is going wrong and how to avoid it. In many cases, the reason is simply that people are tempted by the availability of bank loans and financing facilities to bite more than they can pay off.
This vicious cycle of debt and more debt to pay it off can ultimately grow into a monstrous burden with large monthly payments that make it impossible to take out more loans to cover ongoing bills and obligations. Many people, unfortunately, find themselves in this situation and end up either defaulting on their loans or unable to pay for basic requirements. While it is easy to blame banks and sales people, let’s face it: No loan or financing is done without the borrower’s approval. That is why it all comes down to your ability to keep sound financial planning and try to avoid unnecessary bank debt.
Here are a few basic steps to make sure you’re not accumulating bank debt and heading to a personal financial collapse.
If many people around you are subscribing to a lifestyle where upgrades are easily accomplished by taking out bank debt, you may lose sight of what falls in the category of necessities that require taking money at t a price (like paying for education, housing, etc.) and what is a mere luxury that can be delayed or set aside if not immediately afforded (upgrading car model, vacation travel, etc.) By reviewing your own priorities and keeping bank debt as a last-resort option, you will be in a good position to avoid developing a bad habit of taking debt just because it’s available.
Keep it tight
If taking a loan is the only solution for a financial requirement, remember that this money comes at a price – interest rate and early settlement fees and charges, if needed – and that is why it should be kept as tight as possible. In other words, don’t take more that you absolutely need. If you’re taking a loan to pay for a child’s tuition, don’t get a larger amount to cover a vacation, as well -- even if the terms seem attractive and the bank agents are pushing for it. The best option for sound financial planning is to live within your means – your income. If you can’t afford something, perhaps you just have to admit that you don’t afford it.
With bank agents calling, e-mailing, texting you all the time with offers of credit cards, personal loans, and the like, they somehow establish themselves as the only option for your financial needs. That doesn’t have to be the case. Many employers offer financial schemes for their employees where an employee can take an advance amount against his or her salary. This may come at a much lower rate and better terms than bank loan – but it may require some planning and communication with your employer. So if you’ve an unexpected circumstance that requires an injection of cash, consider your employer’s option first.
If you’re unable to come up with a large amount of money for rent or education, this may be because your savings are pretty shallow. If you begin to put a small amount aside every paycheck you may be in a better position when you have to come up with the money the next time around. So take as little debt as you have to, and work your way to ensure that you won’t be taking loans every time you have to come up with a substantial amount of cash. While payments of one loan may be manageable, compounding payments often is disastrous.
Rania Oteify, a former Gulf News Business Features Editor, is currently a journalist based in Seattle.