Debt undoubtedly causes strain on your finances, no matter they are short term or long term. It is not surprising o see people struggling to pay off debt even if the size of the loan is very small. Quick loans that allow you to borrow hardly between £100 and £500 seem to be affordable, but people find themselves strapped at the time of due date.
People do not take into account the interest payment to determine their affordability. If you have borrowed £100 for 30 days, the total cost of the loan will be £124 (interest @ 0.8%) provided you pay it off on time. With each default, the cost will add up because the lender will charge interest penalties and late payment fees.
When you have multiple debts such as short-term loans with credit card bills, it is quite tough to pay off all debts. A loan is an additional expense. You have left some money after meeting all of your regular expenses to repay your debt. If you are facing cash shortfalls, it should ring alarm bells.
You may believe that you can get out of it if you have multiple income sources. This will not work if you do not carefully analyse your expenditure. taking out a loan is easy and falling into debt is far easier. Here are the mistakes you should avoid when you are on the verge of debt.
You are being entrenched
No matter how much you earn, you can never get out of a debt trap if you do not change your spending habits. It is not unusual that you keep visiting the same restaurants, the same coffee shop and the same nightclub.
You will have several reasons to justify your acts, but have you ever asked yourself whether you can afford to have such habits? Despite earning a good amount of money, you can fall into debt spiral because of your spending habits. If you are prodigal, you will indeed fall off your budget.
How to get rid of overspending habits?
You can switch from bad habits to good ones by following a couple of ways.
- You should use cash as much as possible. If you set a limit on your spending, you can prevent yourself from falling off budget. The use of credit card is bad as it encourages you buying more and more things without realising your affordability.
- Make a list of your fixed expenses such as rent, mortgage, debt payments and make sure that you set aside money for them as immediately as your receive your pay cheque. This ensures that you will miss a repayment.
- Differentiate your needs from wants.
Not creating a budget
You cannot avoid overspending unless you create a budget. A monthly budget will help you get an idea of your cash inflows and outflows. Financial experts suggest that you should create a budget, but it seems like a herculean task for many people. They find it monotonous and tortuous.
Most of the people fall into a debt web because they do not have a functional budget. Having no budget is not a good thing. If you want to get back on the track, you must know what you are spending and where your money is going. You may think that it is too much of work and waste of time, but having no budget while you are paying off debt is a very big mistake.
How to create a budget?
All you need is a paper and pen or your smartphone.
- Start with jotting down all of your expenses. Try to add in even a tiny expenditure. To estimate the total cost of variable expenses, look back at expenses you made in a couple of months ago. Now compare your total expenses with your income.
- Find out the area where you can cut down on your discretionary expenses. This will help you pay off the debt sooner.
- Keep tabs on your expenses. It is better if you track your expenses weekly or bi-weekly.
- Use apps that will alert you if you try to spend more than the set limit.
Not having savings for a rainy day
Have you ever built an emergency cushion? Most of people fail to build emergency cushion because they are living from paycheque to paycheque, and if they have a good amount of cash coming in, their overspending habits take a toll on it.
When debt mounts up, you will likely begin to throw all of your money to settle outstanding dues. You may think that this will whittle down your debt, but on the contrary, it will leave you broke for financial emergencies in the future. It will force you to take out a new loan.
For instance, the total dues you need to pay off are £1500 and you start using your savings to clear your dues. Thankfully, you have paid off half of the debt before an unexpected expenditure occurs. Since you have no money, you will need to take out a 1000 pound loan for bad credit. it means you are back in a debt cycle.
How to create an emergency cushion?
- Set financial goals. Try to put aside at least 10% of your monthly salary. This will help you build your savings, which you can use to meet an unexpected expenditure.
- Make sure that you do not use that money to meet your discretionary expenses.
The bottom line
When you are on the verge of debt, it is crucial that you immediately take hold of your finances. The rule of thumb says that you should create a budget, look over your spending habits, cut down on your discretionary expenses and do not avoid saving money. Apply for a loan when you need it urgently, and make sure that you are taking it out with a lender that offers loans at affordable interest rates despite your bad credit rating. Big Loan Lender is one of them.