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Small loans can cause big problems

Aug 23, 2015 |

A common trend for people who are unable to qualify for a personal loan or a debt consolidation loan with a bank or other mainstream lender, is to look to cash lenders or short term loans to help them meet cost of living payments. This sometimes can become a trap to escalating unaffordable debt with no way out other than a debt agreement or bankruptcy.

Is the new loan cheaper than current debt?

A decision to apply for some form of debt consolidation must include an assessment of whether your chosen form of finance will actually save you money, or is it simply postponing the inevitable?

Just because someone agrees to lend you some money it does not necessarily mean that you should accept their loan. In most cases, cash loans and unsecured bad credit personal loans are only a short term product. It can be offered for a few weeks or several months. Given that these loans are offered to borrowers who do not meet bank lending criteria (high risk borrowers) the cost of finance can be high.

Before accepting a new loan which you intend to use to repay existing loans, take the time to assess if the new loan is cheaper. Where the loan is more expensive than your current debt, accepting it is only likely to lead to more debt problems rather than offer a debt solution.

How will the loan be repaid?

Consider where the money to repay the new loan is coming from. It is unwise to borrow without knowing where the money for loan repayment will come from. Otherwise all you are doing is postponing your insolvency and accumulating debts that you will never be able to afford to repay.

It can be easy to think that because the loan is a few hundred or a couple of thousand dollars that repayment will be manageable. Do not assume anything – identify where the money that will be required to meet repayments and settle the loan in full is coming from. Can you really afford this loan and will it ease your debt position or only further complicate it?

Recognizing insolvency

Insolvency is a position where, despite wanting to do so,  you are unable to afford to maintain debt repayments given your current income and obligations. If this is your current position do not take on any additional debt. There are a number of strategies available that offer debt relief to insolvent borrowers. You may be able to take up some of these and avoid the unnecessary accumulation of debt.

There is no such thing as a small loan where you are already struggling with the loans you hold now.

Posted in: debt help, debt relief, debt relief tips

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