I have written two articles so far on debt. A introduction article on the reality of debt and a secondary article on being aware how much you actually owe. Only when you are aware of your situation can you really begin making a plan to address it.
I consider myself lucky as I got the principles around money management and debt earlier in my career and have managed to stay away from debt until the recent mortgage bond I got. The golden rule regarding debt is to always stay within your means and if you cannot afford it, do not buy it unless its necessarily or its an profitable investment.
Over the weekend I went to help a friend assess her debt situation. Over time, she has gotten herself in a situation such that she will not be able to get through the month without going to a cash loan. She must settle the old debt, at an interest of 25% per month , and take out a new loan to help her cover her expenses. Not an ideal situation to be in but that is where she finds herself.
This morning, my friend is also stressing about an opportunity to buy a car. He was looking to buy a car in the next three month but suddenly a car came up at an ideal price. This meant that he must not arrange for financing as soon as he can. The bank is willing to help him but he must put up a 15% deposit which he does not have. Not an ideal situation to be in but that is his reality.
We brains stormed ideas of how he can bridge his gap to get the 15% required by the bank:
- I could borrow him the money, but I currently do not have the liquidity
- He could ask his Dad but most likely will ask him what he has been saving for such that he cannot afford a 15% deposit.
- He could try another friend but he must promise to pay back the money in a short period of time which means he will have a high installment on the smaller loan in addition to repayment terms to the bank.
- He could ask for a cash loan, but 25% per month just sounds too steep.
- He can just forget about the car and wait in three months, maybe he can make a plan.
- Or He can try a staff loan at work, but HR will probably need a valid reason to approve the loan.
Majority of the time, debt is acquired in an impulsive decision but the impact can span over many years. My first friend there has an account that she owes money for buying a gift for someone. It might have been better to disappoint that someone for that time while you save up some money for it. My friend in the second scenario my loose out on a this good deal if he cannot get the deposit but borrowing to go pay for the deposit could just mean he will not be able to save anything in the next couple of months.
Before you commit to debt, look at the reason why you getting into it. Can you run it past a friend before you can commit to it? Are you prepared to pay that much interest just because you do not want to miss it? Is the item on sale ? If so, compare the discount given on the sale to the interest that you will be paying. Will it still be worth it?
And if you are really desperate to get out of debt, do what you have to do. Sell the furniture that got you in debt so that you settle part of the balance you owe. You can buy cheaper chairs to sit on if that is what you need to do it.
Desperate time may call for desperate measures.