Debt accumulation is a significant concern among borrowers, which never raises alarm bells before a series of escalating payments, unwelcoming reminders from debt collection agencies, and litigation threats from lenders turn into a nightmare. According to the latest survey held in 2022 by the Financial Conduct Authority, 24% of all adult Brits were found with low financial resilience, making up to 12.9 million people, up by 1 million as compared to 2020.
Low financial resilience was the result of unprecedentedly soaring domestic bills and credit commitments. While high cost of living due to the pandemic was to blame for increased burden on people’s pockets, the economy took a turn for better, and reasons for the low financial resilience had never been the same, but what has always been at the forefront of all reasons for people chasing lenders to fund unexpected expenses such as a car repair is a lack of savings.
People have taken the attitude that they should worry less about savings to meet small emergencies due to convenient borrowing. This widespread thought has emerged basically as a result of lenders’ flexible terms and conditions, which banks never consider as grounds for approval, for instance, a high acceptance rate despite poor creditworthiness and small-amount lending, such as £100.
Why do borrowers get trapped into an ongoing cycle of debt?
Loans are not a bad idea, especially if you are using them to bridge a gap in your savings to meet unexpected one-off essential costs, but surveys have found that people purchase financial products and services without being completely aware of how they work and their everlasting impact on their credit reports and budgets.
For instance, payday loans are short-term loans aimed at subprime borrowers to help people tide them over financial emergencies. When your car breaks down and your savings refuse to foot the repair bill, you think of these loans as your best bet. No credit score to be checked, and the lending decision would be made after perusal of your overall income.
The debt is to be discharged in one fell swoop on the next payday, and fees, which are levied if you fall behind on payments, do not concern you, because an exiguous sum is quite manageable, yet such loans are deceptively risky. As the due date comes near, it becomes clear that your budget was not strong enough to absorb the cost of repair, let alone the burden of added interest. As a result, you end up rolling the debt over.
Late payment fees and interest penalties are added, which accumulate the amount of debt. A payday loan continues to be rolled over, as with an increased payment size, it becomes more and more difficult for you to repay. In order to settle the outstanding debt, borrowers decide to take out another loan, but broadly speaking, the act of robbing Peter to pay Paul cannot help them overcome problem debt.
How to break the cycle of debt?
If people do not exercise caution, they will more likely fall into an abyss of debt. Here are some of the ways to break the ongoing cycle of debt:
- Debt consolidation could be the most favourable approach
An unsecured debt consolidation loan in the UK is suitable for those who have already sunk into debt because they have been struggling to keep up with various types of loans. Consolidation loans are personal loans used to settle outstanding debts once and for all, so that only one loan is left to deal with, which is a personal loan itself.
Consolidation is technically a method of combining all outstanding debts into one large loan, which could be secured and unsecured, depending on its size and a lender’s policy. But there is more to it than meets the eye.
While some lenders might feel inclined to accept applications for consolidating debts, they are generally disposed to approve an application for a large amount, with the implication that some loans would still be handled separately. The burden of debt does not seem to be any less, as consolidation loans are also expensive.
- Request a payment plan if consolidation is not an option
Borrowing over and over to eliminate outstanding debts cannot take you anywhere. Consolidation does not always seem to be a feasible option, as most of the time it does not cover the cost of total outstanding bills. This proves to be exorbitant. Borrowers, therefore, are advised to ask lenders for a payment plan.
A debt management plan relieves payment pressure as borrowers are required to settle the debt at revised terms that debt management companies negotiate after assessing their repayment capacity. Borrowers are still obligated to repay the debt, but now payments will be much more manageable.
However, it is worth bearing in mind that participation in a debt management plan entails closing all credit card accounts, and it is recorded on your credit reports. This will severely damage your credit points and continue to affect your borrowing ability for a long period of time.
- Avoid borrowing from unethical lenders
Unregistered lenders charge exorbitant interest rates as they look at subprime borrowers as a business opportunity to make money. The FCA has strictly issued guidelines that on no account should a borrower take out a loan from unauthorised lenders, as they are loan sharks. The onus of liability is upon borrowers to check the authenticity of a lender by checking the FCA Register for their registration details.
In spite of a bad credit rating, borrowers should look for registered and authorised lenders. Fearing the impact of hard credit inquiries on credit reports, they tend to apply for direct lender loans in the UK with no credit check.
Caution is enjoined while applying for a loan. No registered lender could ever be in a position to sign off on a loan application without checking your credit score. Henceforth, it is a must to borrow money from a lender who runs at least soft inquiries to determine affordability.
- Create a budget and a savings plan
Having enough savings can preclude you from borrowing money whenever you are caught unawares by financial emergencies. No matter how monotonous it sounds, budgeting is an unavoidable method to deal with problem debt. Among all budgeting methods, choose the one that works hardest for you. Try them all out. Two budgets cannot produce the same results in different financial circumstances, so you will have to switch between budgeting methods.
Budgeting is recommended because it helps keep tabs on your expenses, giving you clear insight into how much money you can stash away for a rainy day. The more controlled spending you have, the higher the size of your savings will be.
- Borrow money only when it is a last resort
Avoid borrowing money when the nature of the expense is not urgent at all. Ask yourself if you can put it off until you have a budget for it. Consider seeking financial help from your parents first before contacting a lender.
The bottom line
Consolidation debt can help you get out of debt, but you will have to take other measures to break the ongoing cycle of debt. Not until you get to the bottom of the cause will you be able to break this cycle.
