A loop, or debt spiral, is a situation in which the amount of debt incurred exceeds the real possibility of timely repayment or the overall financial burden is simply too high. A debt spiral most often occurs at “one’s own request,” which means that most people are initially not even able to see the problems coming.
What is a debt spiral?
A debt spiral, or interchangeably a debt loop, is a term that appears quite often in financial advice books, credit blogs and, more recently, on bank websites that warn borrowers against over-indebtedness. Indeed, a debt spiral is closely related to the number of debts taken on.
If you only repay one loan, such as a home loan or cash loan, there will be no question of a debt spiral, unless you have, for example, non-banking obligations that are a significant monthly burden.
A debt spiral can be talked about when the number or amount of monthly obligations is so large that we are no longer able to pay them on time. A debt loop most often occurs when one obligation, such as a non-bank loan, is paid off by incurring another obligation.
Adebt spiral can also occur when we are imprudent about the loans or credits themselves and take them out at short notice for anything that comes to mind. These can be seasonal whims, such as “holidays for the rich,” expensive gifts, a spontaneous trip, new household appliances or furniture, and so on.
IMPORTANT: Taking on a lot of credit obligations in a short period of time is a simple way to fall into a debt spiral, the exit from which may be much more difficult than we think.
How not to fall into a debt loop?
First of all, use common sense! There is no better way to avoid financial problems than to exercise reason and restraint in the use of financial products from banks or loan companies.
Before taking out a new credit commitment, whatever it may be, think twice about whether you will be able to pay it back. Not in a month or two, but in six months, a year or three years. The number of financial obligations is crucial and it is not worth underestimating this factor.
To avoid falling into a debt spiral, absolutely avoid taking out loans and credits solely to pay others. This is one of the more common reasons for the formation of a debt loop, the only way out of which can be meaningful consolidation and settlements with creditors.
How to get out of the debt spiral?
Getting out of a debt spiral first and foremost requires a plan of action and, as we have already mentioned, preferably settlements with creditors. Let’s remember here that they (loan companies, banks, etc.) only care about regular payment of loan installments, so in the vast majority of cases such settlements will be possible.
There are several ways to get out of the debt spiral, and they include:
- consolidation of obligations
- extension of credits and loans
- reducing non-bank debts
- resignation from paid services
Consolidation of obligations is one of the most effective methods to get out of the debt spiral. By combining multiple credits and loans into a single obligation, and extending the repayment term, we can gain not only lower loan installments, but also get rid of some additional costs. We write more about loan consolidation in this post.
Loan rollover. Loan rollover involves postponing the repayment date of the obligation, which gives us more time to settle the debt. In the case of loans, a rollover will usually involve a reduction in monthly installments, which will also allow you to settle your obligations more efficiently.
Reducing non-bank obligations. We live in an age of subscriptions to everything. From VOD, or on-demand movies and series, to low-cost courier shipments on popular sales platforms, to phone subscriptions. Each of the monthly fees charged usually automatically deprives us of a few tens of zlotys, and this reduces the wealth of our wallet. For the time of getting out of the debt spiral, let’s give up unnecessary subscriptions.
Giving up paid services. Many credit obligations, but not only, are loaded with various types of additional services. Usually they are totally unnecessary and only add to the loan installment. A great example is phone insurance, often purchased when buying on installments. Do we really need to insure the phone? We are already leaving aside the fact that just taking out a loan for a phone is not a wise solution, and there are hundreds of models on the market that we can purchase without installment payments.
Finally, let’s remember the most important issue of spiraling debt. This is because it works somewhat similarly to addictions to psychoactive substances. By the time we realize that “something is wrong,” it may be too late. We must therefore approach credit commitments sensibly, and before buying a new gadget, ask ourselves whether we really need it.
