Excessive debt can result in more than just loss of sleep, it can literary kill you. Sustained high stress levels can lead to ailments of all kinds. Stress caused by harassment by creditors who will hound you with threatening letters telephone calls and attachment of your property. You become susceptible to panic attacks when the phone or doorbell rings or when mail arrives. You are likely to have emotional outbursts and an explosive temper. Many highly indebted individuals have done horrible things, even murdered family members while in such emotional state. At work, it is not easy to concentrate on work and a lot of time will be spent looking for solutions to your debt problems.
A highly indebted person finds it impossible to relax and have fun. In an attempt to achieve a relaxed state, many end up abusing alcohol and other drugs, further deteriorating their financial situation as money that could have been used to pay off debts is diverted. They lose self esteem, self confidence and ultimately self respect. They live in chronic fear and, in extreme cases become suicidal.
One of the mistakes with loans that often leads to debt overload is pyramiding. Pyramiding of debt refers to a situation where a loan for a recurring expense has not been cleared by the time another loan is taken to pay for the expense again. It results in mounting indebtedness and large interest costs.
One common example is a person who takes a five year bank loan to buy a car. After servicing the loan for three years the person decides, or is encouraged by the bank to top-up the loan and buy another newer car. The loan balance for such a person will remain high since each time they pay it down the loan they take a bigger loan and extend the repayment period. Taken to an extreme, one can find themselves with a permanent loan with an ever increasing interest charge.
Some people pyramid with credit cards, buying groceries then paying only the minimum required payment. By the time they need to buy more groceries, they are still carrying a balance for last month’s groceries. This goes on until they hit the credit card limit.
Many people will take a loan to pay for a holiday, a wedding, new furniture or even household appliances as long as there is some cash left over in their salary to make the installment. This kind of debt abuse can cause serious financial difficulties with all the attendant stress. If you find your pay slip reading like a roll call of financiers, it may be time to seriously reevaluate you financial behavior.
One of the possible solutions is loan consolidation. Here one financier gives you one big loan that pays off all the small loans and gives you an extended repayment period. While the premise sounds very appealing, one loan repayment that is lower that the total of the small ones it replaced, it may not be the wisest route take. This method of restructuring debt result in higher interest cost for the borrower. Probably a better way to clear such debts is to tighten one’s belt, then pay as much as you can, with the highest amount going to the loan with the highest interest rate. When one loan is paid off, the installment for that loan is immediately applied to the loan with the highest interest rate out of the remaining loans. When you do this, you will find that the total loan repayment remains constant but loan repayment is accelerated and total interest reduced significantly.
Once you have paid off your loans you would be well advised never to enter another debt trap again. You can avoid doing so by making sure you have an emergency fund and that you do not borrow when you can save for something and also commit yourself only to expenditures you can truly afford.
For a comfortable, stress free life, control your debts. Limit your debts so that you never pay more than 36% of your gross income towards debt and borrow only to buy appreciating assets, to increase your ability to earn and for viable business. No matter how tempting the offers are, never allow yourself to be seduced into borrowing for lifestyle assets that you can save for. Prevention is better than cure.
© Manyara Kirago, RFC®
www.financial-counselling.com
