How people get trapped in debt, and how to fix it

It is a lot easier to fall into the debt trap than many people in New Zealand think. Sometimes life can spiral out of control and occur in an instant by an unexpected event, or a gradual deterioration in your finances. In most cases there are actions and help available that you can use to reduce the impact on your finances. One of the main problems is denial, so let’s get real.

Many people bury their head in the sand, hoping their finances will improve by themselves, when in reality this won’t happen. This “strategy” is to a certain degree understandable but once you are faced with reality, the situation is likely to be considerably worse than you expected.

Low income

Whether you are single, in a relationship or have a family, you will see fluctuations in your income over the years. It is important to review and adapt your expenditure, especially if you are going through a period of low income. While many people review their investments and assets on an annual basis, you need to be a lot more hands-on with your budget. Living within your means is a somewhat patronising phrase but, in this scenario, it is very apt.

Relationship breakdown

When in a relationship, there are many costs which can be split, hence on average, per person; it is cheaper to live as a couple than on your own. Unfortunately, relationships will go through ups and downs, and some will breakdown beyond repair. Facing life on your own after living as a couple can be challenging both mentally but also financially. In the immediate aftermath, your financial scenario may not be the focal point of your thoughts. This is when many people will slip into the debt trap which can be difficult to get out of.

Poor money management

One of the more common reasons people are caught out by the debt trap is simply poor money management. A failure to plan ahead, take into account oncoming costs and basically spend with no budgetary restraints is a recipe for disaster. It is imperative that you take control of your finances, manage your money and plan ahead. Living from hand to mouth, even if you have a relatively high income, is dangerous. One unexpected cost or a missed loan repayment could see your finances come crashing down.

High cost of living

Those who experience financial issues often receive unwarranted criticism as outsiders look for “reasons” for the deterioration in their finances. Stereotypes and wide of the mark assumptions often ignore the basic problem for many people, the rising and relatively high cost of living. This is the scenario in which social security payments should kick in, assistance should be available but people need to seek help. They say that pride comes before a fall, but if your finances are struggling and help is available, it is imperative that you take it!

Credit card debt

While credit cards are very useful financial instruments, for many people they can be the flame that ignites their own personal financial crisis. In a perfect world, we would all repay credit card expenditure on a monthly basis thereby avoiding interest and any charges. However, human nature means that many of us will spend that “little extra” which we can’t afford to pay back immediately. As this “little extra” begins to grow, credit card balances are not paid in full each month, a minor cash flow problem can very quickly become serious. It is easy to become dependent on credit cards, spending beyond your means, until you hit the limit. This is when many people are faced with financial difficulties and need to take immediate action.

Overdraft debt

If you ask any bank about overdrafts, the official line is that they are short-term financial buffers and should not be seen as long-term finance. In reality, the interest and charges created by overdrafts are significant and a prominent part of the banking industry. As these arrangements are considered “short-term” the rates tend to be relatively high. However, if you are continually using your overdraft, pushing the limit on a regular basis, eventually you will literally hit the buffers.

Many people fail to appreciate that your bank can withdraw overdraft facilities with very little notice. They may decide to freeze your overdraft, begin discussions to convert into a personal loan or take further action if you are unable to pay.

Unexpected expenses

By their very definition, unexpected expenses can occur at any time and on occasion weaken your finances. If you have a hand to mouth existence, whether for a short while or in the long-term, unexpected expenses could tip you over the financial precipice. In a perfect world, we would all put aside a little money into our savings account each month to cover unexpected expenses. If only it was that easy!

Health issues

Whether a short-term illness or long-term medical condition, health issues can have a huge impact on your finances. This may involve taking time off work, additional medical bills, the impact on family and friends and their physical/mental health. Those in a position to do so may look at medical health insurance which can speed up the treatment process – but not everyone is in this situation. Slowly but surely coming to terms with health issues and the impact on your finances can be devastating. Consequently, it can be easy to slide into the debt trap, filling a short-term financial void with additional finance.

Unemployment

While unemployment can have a huge impact on your mental/physical health, it can very quickly decimate your finances. Government benefit payments may be available but these very rarely cover missing employment income. As you adjust to your new income, your new life, that transitional period can be a wake-up call. Even redundancy money, which may at the time seem generous, will very quickly disappear as your only source of funds. In this situation it is important to remain focused, cut your financial cloth accordingly and make immediate changes.

Lack of budget control

If you think of your monthly and annual budget as a roadmap, plotting your means of getting from A to B, this should change your mindset. It is similar with a financial budget. You begin from position A, the start of the month, and you need to get to position B, the end of the month. Plotting, as best you can, income and expenditure over the month will help achieve your short-term goal. However, you’ll also need to take into account annual expenses and put money aside for these.

Modern day banking apps are available which create reports of your spending and give you an idea of where you may be able to save money. Looking at these reports is a reality check for many people, prompting change and greater consideration about their finances. While it is difficult to see how you can manage your finances without a budget, many people try!

Addressing your financial challenges

Fixing your financial issues is relatively easy in theory but may be a little more challenging in practice. Aside from a likely sea-change in your weekly, monthly and annual expenditure, you need to regain control of your finances as soon as possible. For many people this will involve a consolidation loan. The opportunity to consolidate all of your debts under one agreement, remove the myriad of individual minimum monthly repayments and restructure your finances.

Consolidation loans

Debt consolidation loans allow many people to avoid more serious financial issues. When considering debt consolidation loans it is important that you act sooner rather than later. Burying your head in the sand is not an option, take control, be positive and start the fightback. Here at Alternate Finance we offer a range of different loans including debt consolidation.

As a responsible lender, we will consider your financial situation, and where possible present a number of potential solutions. It is important not to engage the natural instinct to pay off your debts as quickly as possible. For example, if you were to agree a relatively short-term debt consolidation loan consisting of monthly repayments you could afford at a stretch, what happens if you experience unexpected expenditure in the future?

In many cases it is sensible to err on the side of caution, consider an extended duration and if possible, make overpayments in the future. This creates a two tier structure, your minimum monthly repayments (your legal obligation) and additional overpayments, which are optional. This structure gives you the opportunity to “comfortably” cover monthly repayments and use any surplus capital in the future. Any overpayments will reduce your interest charge and in many cases the duration of your loan.

If a debt consolidation loan is not in your best interest, we will be honest and upfront and tell you so. In this scenario, we can offer a degree of guidance about the alternative solutions out there.

Climbing out of the debt trap

However you find yourself drowning in a sea of debt, however bleak the future may look there are options to regain control of your finances. Debt consolidation loans are an extremely useful means of reducing your minimum monthly repayments, and potentially extending the duration of existing finance, to make it more affordable. Alternate Finance is positioned between the traditional banks and high interest payday lenders, filling a void which has for many years been ignored.

Our deep-seated understanding of the debt trap, the options available and the long-term solutions, has helped many of our customers. Securing a debt consolidation loan will introduce a degree of control in the short-term. In the longer term, it is important to maintain repayments but also adapt and change your budget. The alternative is madness, doing the same thing over and over again and expecting a different result.

Reach out, if you need a helping hand.