Is your bank account looking empty? Are your bills piling up on the kitchen table? Your first thought might be that you’re at the end of your financial rope. For many who find themselves with their back against the wall, their immediate reaction is to seek out a loan from a lending agency.
But beware! Getting a loan can set you up for a spiralling and never ending cycle of debt, a.k.a a debt trap. That’s why it is so critical for you to be 100% sure that you have exhausted all your other financing options.
Many a time, your financial situation is not as bad as you think it is. Steps like delaying your bill payments, borrowing from friends and family etc. can help alleviate your pain. You should seek to embark on these steps before taking on debt.
To help you become aware of your financial condition, we have put together the following checklist to know if you are at the end of your financial rope. Take heed! It could save you from being launched into a vicious cycle of debt.
Level 1: Have you tried paying your bills a bit later?
When your debts build up, you might be tempted to pay every creditor as quickly as possible. But this would be foolish. Some creditors are willing to extend your payment deadlines, while others might hold you to task and charge you high interest rates and penalties.
So you need to pay off your debts strategically!
You could prioritize the debts as follows:
- Debts that carry the highest interest rates or penalties should always be attended to first.
- Creditors that provide less leeway in terms of repayments should be paid off first.
- Leverage creditors that are willing to extend your payment deadlines. It’s terrifying to call the person you owe money and ask for an extension. But trust me, it’ll go a long way in managing your cash flow.
Level 2: Have you sold your extravagant or unnecessary personal items?
A lot of people in financial strife don’t actually have a lot more net worth than they realize. Artwork, fancy electronics and extravagant clothes keep your net worth locked up in assets that can’t be used to pay off your bills.
That’s why you should consider selling all those extravagant and unnecessary personal items that are lying at the corner of your room; even if it’s at a second-hand price. This process is called liquidation. Basically, you’re converting your hard, unmovable assets into liquid cash that can be used to pay off your bills and debts.
This way, you can gain some liquidity and build up reserves for the next financial emergency.
Level 3: Have you borrowed from friends and family?
‘A friend in need is a friend indeed!’ Who can be a better life support than your friends and family? If you have a trustworthy friend or a family member, then they are the best options to seek any financial help from before you approach any bank or a money lender.
Your friends and family should be your first resort during a financial crunch as they’d be more willing to waive any interest rates and grant you an extended time for repayment as well.
However, be aware that borrowing from your loved ones can put a strain on your relationship. You must be ethical and be modest enough to repay back the borrowed amount within a respectable time.
Level 4: Have you borrowed from the bank?
If borrowing from friends can’t relieve you from your situation, then you have no other option left than to borrow from lending institutions like banks to save yourself from high interest based late fees.
Banks are a trusted source of funds, and they offer a variety of loans to meet your needs.
If you need to borrow a small amount that you feel you will be able to repay within a short period of time, then you should look for personal loans or a line of credit.
For big payments. you may consider mortgaging your home, take loan against home equity or make a lease, which comparatively has lower interest rates than other types of loans. The permission to get loan grants from banks is based on a good credit score.
Do bear in mind that borrowing from an established institution like a bank usually requires that you aren’t overwhelmed by debt (negatively affects your credit score) and you haven’t been in debt frequently/ very long.
Level 5: Have you borrowed from licensed money lenders?
If you have a poor credit rating and if banks and friends have refused you, then you might want to turn to money lenders. This is the best option if you’re expecting your financial situation to improve soon, and need a loan just to tide you over till the next payday.
I say this because money lenders are known for charging high interest rates to cover their risk when lending to people with lower credit scores. In addition, money lenders get a bad rep because some have been known to use predatory lending practices.
Where should you find trusted moneylenders? In my home base in Singapore, platforms such as LoanAdvisor can point you to money lenders that meet regulatory requirements. Using such services is hassle-free, but don’t let that lure you in to a false sense of security! You must be aware that such platforms will likely have some sort of relationship with the money lenders. So just bear in mind that any positive reviews that you read might not be entirely independent!
Level 6: Can you consolidate your loans?
Consolidating your loans is one of the smartest ways to pay off your debts faster. Consolidating helps you to combine all your high interest balances to a lower rate of interest so that you can clear off the principal amount faster.
To consolidate your loans, you can choose to take up a low balance transfer rate to move from a high interest scheme to a lower interest scheme. Balance transfer fees are usually capped at 3-5% and are a one-time investment.
By doing quick calculations, you’ll find that you can pay much less with this new lower interest rate than you would have with the numerous separate interest rates, despite of the balance transfer fees.
You can also use a home equity line of credit to pay down your credit card debt at a much lower rate than what your credit cards would charge.
Once you have consolidated all your loans into a single low interest rate debt, then you should no further build up on additional debts so as to prevent racking up.
Level 7: Filing for bankruptcy
This is where you’d really be at the end of your financial rope. If you’ve tried everything above and are still unable to pay off your debts, then you may choose to declare yourself as bankrupt.
However, filing for bankruptcy is not an easy job and it will cost you time, stress and money. You can visit the Supreme Court’s site to download and fill a debtor application.
Once your application is accepted and you are declared as a bankrupt, you would need to submit reports of all your financial affairs, assets and liabilities with a commitment to repay back your debt within a reasonable time frame.
Now, being declared bankrupt doesn’t mean you’re off the hook on your debts.
You’ll be required to stick to a pre-planned repayment scheme and pay a Target Contribution to slowly and steadily clear off your debts.
I’d advise most people to avoid bankruptcy. Some of the restrictions you would face include not being allowed to leave the country without permission, facing restrictions managing your business, and difficulty in seeking public jobs.
It’s always better to save yourself from getting into the grave before you dig deeper. Nip the problem at the bud!
If you become aware of your financial condition deteriorating and arrest it early, then you wouldn’t even need to think about bankruptcy.
Stay out of the pay check to pay check lifestyle and know your way out from the debt trap to start living a life that you had always dreamt of! Good luck!