Cycle of Debt

The following is an article provided by Melanie Taylor

Sometimes life leads people further and further into debt. This article addresses ‘debt cycle’ warning-signs and suggests ways to break the cycle.

Right at the start

It’s possible to avoid getting into debt by saving regularly. Even saving a small amount is better than nothing. It’s possible to really enjoy saving up and seeing a pot of money grow. It’s fun to plan what to spend savings on! It’s also reassuring to know there’s some savings to fall back on – if you’re faced with unexpected costs, they can help you meet them without getting into debt. 

Debt builds

• A drop in income can lead to borrowing.
• Unexpected bills / expenses can lead to borrowing.
• A change in circumstances – like divorce, becoming a parent or your mortgage’s interest rate increasing – can lead to borrowing.

It’s best to take action at this stage. You could use savings to cover any additional expenses, enquire about benefit entitlement, budget carefully and basically make sure you only spend as much as (or less than) your income.

Borrowing to repay debt

Getting further into debt to maintain a lifestyle is a nasty trap to fall into and can lead to further borrowing in the future. And borrowing to pay essential bills is a clear warning sign that debt is becoming unmanageable.

A debt consolidation loan can be a route out of the debt cycle, under the right circumstances. It could reduce your monthly repayments and you might be able to find a loan with a lower interest rate than your current debts. However, it may cost more in the long-term if repaid over a longer period – and it won’t be appropriate if you’re really struggling with your finances.

If you can’t afford your debt payments, a Debt Management Plan could be one option, or for more serious debts, an IVA (Individual Voluntary Arrangement) or bankruptcy may be the best way to tackle your debts.

Maintaining a lifestyle while repaying debt

When you owe money, a portion of your regular income will need to go on servicing your debts. If those debt repayments take up a large slice of your regular income, it can be difficult to maintain a lifestyle you’re used to.

However, if you live within a budget, you can get a real sense of satisfaction from repaying debt. When there is a clear goal in sight – perhaps 5 years to be fully debt free – you might find this makes it much easier to stay focused on that goal.

Keeping track of all repayments and watching a debt reduce over time can be almost as rewarding as seeing a savings pot grow. And if it’s possible to put some money away at the same time as repaying your debts, that can be even better.