The debt cycle is nothing new. Consumers all over the world have grappled with debt forever and more often than not, it could have been either completely avoided or taken care of more efficiently. Too many Canadians don’t understand the debt cycle or how to get out of it. In light of the current pandemic, millions of Canadians have found themselves saddled with unexpected debt and so the debt cycle begins again. But this time, it can be different. Read on to find out more about understanding the debt cycle, why you’re stuck in it and, more importantly, how to finally get out of it!
What is the Debt Cycle?
The debt cycle is basically known as the hamster wheel of finances. You’ve gotten into debt and continuous interest fees and mismanagement or funds – or lack of funds – makes it impossible to get off the hamster wheel. Usually, this starts with either a gross miscalculation, or the unexpected like a sudden job loss or illness. Debt really just means you have spent more than you can afford to pay back, but sometimes, these expenses can’t be avoided.
If you don’t have an adequate contingency fund or your debt and its accumulating interest are far over and above what you can afford to pay back, you won’t be able to get out of the debt cycle without some help. There is nothing you can do to change your past – whether you made poor decisions or were just hit with bad luck. There is no use feeling ashamed or upset about it. What you can do is find a way to fix it in the quickest, most effective way possible for you.
Here are some of the reasons you are stuck in the debt cycle:
1. You Are Paying the Minimum
If you are paying the minimum payments required on your debts, you are looking at a very long road ahead of you – especially if you continue to accumulate more debt as you go along. The minimum payment is the lowest amount needed to maintain your credit score rating, but if you are never putting aside larger sums, the compounded interest added is sending you back to square one every month.
If you are paying the minimum on more than one bill, that will also impact your ability to pay off the debt. When you have several bills that you can only afford the minimum payment on, you owe more than you can reasonably pay back and you are unlikely to get to the finish line without a little bit of help. This process means you are constantly paying and never getting anywhere, which is the exact definition of the debt cycle.
2. You Have Credit Card Debt
Credit card is the worst debt you can have. To start off, it’s an unsecured debt. That means the debt you have affects your credit rating, even if you are paying the monthly minimum. Carrying a balance from month to month also impacts your credit rating. As if these weren’t bad enough scenarios, you have the interest rat race credit card companies loop debtors into. The interest rates are so high that if you continue to pay the minimum, you are unlikely to pay off the debt in a reasonable amount of time. The debt accrued may even surpass what your original debt was and you will have been paying nothing but interest for years.
Credit card debt can have disastrous effects on your credit rating and it can be nearly impossible to get out of without a little help and some proper financial planning. If you are saddled with credit card debt – especially if you owe a substantial amount on more than one card – the debt cycle will continue to wear you down and deplete your funds.
3. You Don’t Know How Much You Owe in Total
It can be scary to take a global picture of your financial situation. Many consumers choose to close a blind to that and simply go about paying their bills as best as they can. The only problem with this is that you can’t correctly budget your spending or plan your repayment without having the full picture. Instead, it is best to sit down and figure out exactly what you owe all across the board. Next, you can start planning how you will pay this debt off and how long it will take.
Not knowing your full total means you are sending off payments blindly and there is almost no end in sight. This can discourage you at times and cause you to make poor decisions which will only worsen your situation. The only way to get out of the debt cycle is to take control of it.
4. You Are Too Embarrassed to Seek Help
Many consumers are embarrassed to sit down with a financial expert and admit they have a huge problem with debt. Some see it as a failure, but we see it differently. Debt can be the result of poor financial decisions, but more often than not, it is the result of trying to survive the unexpected. An unforeseen job loss or illness, or even the unexpected expenses that come up while raising a family can all lead to debt.
If you don’t seek help, you may just bury yourself further and further into debt. There is nothing to be embarrassed about. Millions of Canadians are in debt and navigating the same troubled waters you are. Instead, take control of your debt and break the debt cycle for good.
5. You Maintain a Much Too High Cost of Living
Buying an overly expensive home is one of the biggest financial mistakes consumers make. This is not really the consumer’s fault either. Financial experts constantly discuss the importance of investing in appreciating assets rather than depreciating assets, which is true. Of course, it’s best to invest in a home than in a vehicle. However, many experts don’t talk much about how to choose a wise investment – even when it is a home.
While your home does appreciate and you won’t lose your money, you also have to be able to afford the cost of your mortgage and operational costs (heating, electricity, insurance, property taxes, etc.). As a rule of thumb, your home shouldn’t cost you more than 20% of your gross annual income and this includes all costs, not just the mortgage. If you are paying more than that, your home is eating up too much of your income and making it impossible for your to finish off your debts.
6. Your Repayment Plan Exceeds What You Can Afford
Banks and credit card companies aren’t exactly known for their flexibility. They offer a very rigid repayment plan and once your debt gets too high, that repayment plan may not work for you. Making the minimum payment on your credit cards to counter this problem is not the solution, as we discussed above. What you need is a payment plan you can work with. You need to be able to make all of your payments so you can repair your credit score and still have enough income left to be able to live and raise your family without accruing more debts along the way.
If your minimum payments are exceeding what you can afford to spend every month. You have to make a full stop! At this point, you should consider seeking out financial help in order to get your debt back under your control. So you can minimize your stress and get back on track.
7. You Don’t Have a Budget
It is important for everyone – whether you are in debt or not – to have a monthly budget. This is basically a spreadsheet that keeps track of all the income coming in and all the income going out. It allows you to see exactly how much you have to spend and save each month to make ends meet. With a budget, you know you can’t exceed a certain amount in certain areas, which helps keep you disciplined.
If you are spending without paying attention to whether or not you are exceeding a budget. For a given service (like takeout food for example), then you are very likely to overspend. A few bucks here and there may not seem like much but at the end of a year. Those expenses add up and they could’ve gotten you out of debt sooner. A balanced budget allows you to see exactly what you can and can’t spend and pushes you to spend wisely. Operating without one can lead to an accidental overspend.
How Do I Break the Debt Cycle?
Breaking the debt cycle can be tough, especially when you owe a large amount of money back. The first thing you can try to do is earn more money. You can seek out a promotion, a better paying job. OR even start a side-hustle to help you gain extra funds. If bringing in more income isn’t an option, you can move on to selling items. You have or downsizing your home to get access to more cash and minimize your expenses at the same time.
The only way out of the debt cycle is to find a way to stop adding more debt to your current debt, make large enough payments to make some real headway, and to budget yourself to the dime to ensure you stick to the plan at all times. But despite your best efforts, you may still come up short if your debt load is high. So what do you do then?
The only way to break the debt cycle and cut your losses is to seek out a loan to help get rid of your debts from various creditors and then work towards paying on single debt alone. Some people think it’s all the same. Whether it’s one debt or five, it’s all the same, right? Wrong! Owing several debtors means you are overpaying in interest by a lot, you just haven’t noticed since it’s spread out over many bills instead of just one. Long-term, you are paying way more than you need to.
Securing yourself a loan can help you get rid of those debts, lower your overall interest rate, help you rebuild your credit score, and get you out of collections. Bonus: with the right loan product, you can even turn your unsecured debt into a secured debt, which is the type of debt that doesn’t impact your credit rating.
How Can BHM Financial Help Me Break Free from the Debt Cycle?
BHM Financial is here to help. At BHM offer several different loan products that can help you get access to the funds you need to get rid of all of your outstanding debts. Our company differ from other lenders in a major way – we work alone. We approve our loans and we provide the funds, so we don’t have to spend days waiting for outside approval. We can approve your loans the same day and get you the cash you need to pay off your debts.
The only way out of the debt cycle is to minimize interest and create a repayment plan that makes sense for you. Otherwise, you’ll end up right back where you started. At BHM Financial, we offer several loan products with different benefits and advantages. Here’s a closer look at some of the best debt solutions we offer:
Bad Credit Personal Loan
Getting a personal loan with bad credit and a ton of debt is not easy to do. If you visit a traditional banking institution. Once they assess your credit situation, they’ll likely refuse. But we know that this is your way out of debt and your past doesn’t always dictate your future. At BHM, we will never base our decision on the past. Instead, we base our decision on your current income. We can get you your cash the same business day. Plus, our expert team will work with you to develop a repayment plan that you can afford.
Truck, RV, Trailer, Car, or Boat Loan
If you own one of these vehicles and it’s fully pay off, you can use it to help you. We leverage the cash value of your vehicle to get you access to the cash you need. Your vehicle has value while it’s parked in the driveway so why not use it to get your debts pay. Get rid of some of that compounding interest. Meet with one of our BHM Financial experts to find out if your vehicle qualifies. How this type of loan can help you obliterate your debt without having to actually sell off your stuff.
Home Equity Loan
A home equity loan allows you to convert your unsecured debt into a secured debt. If you have equity in your home, you can then borrow against the value of the equity to get cash to pay off your outstanding debts. Not only will this reduce your interest rate overall, but it’ll turn your unsecured credit card debt into a mortgage debt, which is perfectly acceptable as far as your credit is concerned. The initial act of borrowing money against your home will have some impact on your credit score, but this is minimal when compared to the effects of not paying your debts or carrying unsecured debts with you for a long period. Plus, paying off your debt will actually help you repair and rebuild your credit so this is a perfect example of short-term pain for long-term gain.
Debt Consolidation Loan
If you owe several creditors, a debt consolidation loan can help. We basically pay off all of your creditors with the debt consolidation loan. Then you only need to pay us back. That means one interest rate, one payment, and no more collections agencies tracking you down. Consolidating debts will offer you a lower overall interest rate so in the long run. you’ll not only be paying off your debt but saving money, too.
Financial Advice
With all of our loan products, you’ll also get the opportunity to work out a personalized repayment plan that you can afford. We want you to pay your debt and stay out of debt. That’s why we offer financial advice to help you better understand each of our loan products. We can help you create a repayment plan that is suitable for your needs. Our BHM Financial experts can also help you by building a budget for you so you can not only pay down your debt. Gear up for a debt-free future, as well.
When Should I Ask for Help?
The debt cycle is one that can suck you in rather quickly. The sooner you seek out financial help, they more likely you are to preserve your credit and get yourself out of debt. There are many downsides to debt including health side effects, financial side effects, and more. Before your debt takes over your life, seek help from the experts at BHM Financial to get that debt problem under control. Remember, our goal is to out you back in the driver’s seat so you can finally take a sigh of relief and begin living your life.