When you have personal goals you want to accomplish, but lack the financial resources to reach them, borrowing money would be a logical step to consider. There’s nothing wrong with going into debt so long as you pay your dues in time and ensure that the money you’ve borrowed is used to fund necessities. It becomes a problem when you’ve found yourself so deep in debt that you have no way of paying back what you owe.
Defaulting on debt takes a heavy toll on your financial future. You may be disqualified from applying for future loans and your financial options become limited when creditors are no longer confident in your ability to make on-time repayments, let alone your capacity for financial responsibility. You wouldn’t want that to happen, especially if you plan on securing a mortgage or paying for medical emergencies. Avoiding a debt default is crucial so here are a few tips to help you steer clear of that:
1. Understand your financial position
The key to avoiding defaulting on your debts is to get a clear picture of how deep a hole you’ve entered. Understanding your current situation will help you make sense of your current earnings and liabilities, allowing you to develop a strategy that will keep you from failing your creditors. Consider the total amount of money you owe to all of the individuals and institutions you’ve borrowed from.
It also matters to consider how much of your monthly income goes to repayments on student loans, your mortgage, as well as your current auto loan. You might be overwhelmed by this, but it’s crucial to help you adjust your spending habits and review debt relief strategies you can opt for.
2. Come up with a budget
Considering how severe the amount of debt you owe to several creditors, you may have to consider setting a manageable budget. As you take your earnings into account, consider prioritizing your repayments. The rest of your earnings should go towards essentials as well as a dedicated savings account.
Doing this will help you commit to your repayment schedules without having to sacrifice daily necessities. However, for this to work, you need to build enough discipline and control how much you spend on non-essentials, such as eating out and shopping for new clothes. Unless you have a large enough window in your financial posture, you might as well stay frugal until everything becomes manageable.
3. Opt to negotiate with your creditors
In case you owe too much across multiple lenders, you may still struggle to stay within your budget and keep yourself from spending over and beyond your ceiling. If that’s the case, you can always reach out to your creditors and see if you can get them to reduce your liabilities.
The best case scenario is when they approve to reduce your monthly dues, but this will reflect badly on your credit record. You just have to make the most of the window you’re given or else you’ll push yourself to a corner with no other recourse in sight.
4. Get a professional to walk you through
Most countries would give citizens options to deal with too much debt or suffer the consequences if they still fail to settle their dues. In South Africa, if you’re asking yourself, “what is a garnishee order”, it’s simply a legal right for any creditor to get a portion of your paycheck and deposits through your employer or bank.
You wouldn’t want that or any strategy to happen to you, so it helps if you could undergo a debt review with the help of a financial advisor. This works well if you start missing your repayment deadlines or you have accumulated a higher-than-average debt-to-income ratio.
Endnote
There’s no shame in being in debt, but being on the brink of defaulting could financially paralyze you. Consider these tips and start embracing financial freedom!