How To Avoid Getting Into A Debt Spiral
The debt spiral is what happens when you use borrowed money to pay off other loans, which is known as consolidating debt. This is usually done under the impression that payments will be smaller, advertising lower monthly payments; however, the overall cost of paying back a consolidated loan is often far greater than the value of the original loans, and because monthly payments are smaller, the loan takes longer to pay off, and therefore accumulates more interest. It's easy to see how a negative spiral is created.
If you are already engaged in this cycle, it is very hard to see a way out without resorting to bankruptcy, or at least an IVA. In this situation it is important to seek help; see our debt charities page for more information on how to do so. However, there are other steps you can take, and (besides refusing to take out any more loans!) the best thing you can do is to be aware of your finances. Keep on top of how much money is coming and going, monitor the rate at which your debts are growing or shrinking, and begin to put aside savings - as much as you can afford - as well as paying out to clear your debts.
- Get useful tips on how to create a monthly budget
The practice of keeping savings is key to helping you avoid the debt spiral. Without any savings, as soon as an unexpected, unplanned-for bill comes along, you have no choice but to borrow money to deal with the urgent matter at hand. However, as you accumulate savings, this creates an alternative option which doesn't involve you borrowing money from anyone at all! So even if you have to make an unexpected payment, your debt doesn't get any bigger.
- If you feel you are in a situation where you need to talk to someone about your debt problems, speak to a debt charity who will be able to offer free help, counselling and in some cases debt management plans.
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