Ways of dealing with debt

Theory and practice

Looking through articles on the Internet, in most cases you will find the same advice. Brilliant letters that open on a consolidation loan and end in consumer bankruptcy. I must disappoint you — this is very harmful nonsense that only feeds on your situation and I will tell you why I think so.

Most of this content is SEO-enhanced (i.e. obtaining the highest possible position in the search engine) publications on financial services. It so happens that 99% of financial portals place links to offers of such loans in the content of an article about a consolidation loan. Of course, if you take out such a loan, they get a commission for it. This is how affiliation works.

I think you have already connected the dots yourself and guess that such content is not created primarily for you and solving your problems, but for the earnings of the owner of the portal. It was, is and will be. While this is true in many subjects, there is a clear conflict of interest in the fight against debts.

The second thing is a consolidation loan in itself — its structure and way of functioning do not work in your favor. When you hire him, you turn a lot of different commitments into one new one. That seems fine, as long as you don't think about it. Usually you will receive a slightly lower monthly installment, however, a much higher total cost.

The fact that the full amount of loan repayment is growing does not need to be explained. However, why is a lower installment bad?

• Debt broken down into lower installments extends over a longer period, and as a result, you pay more interest each month.
• One lower installment gives your pocket some slack, which can cause you to take out another loan.
• The installment has a fixed minimum level, which significantly limits your ability to fight debts, according to the most effective method.

Repayment according to the highest profitability

There are two main methods of dealing with debt. We will start with a purely mathematical approach that maximizes your efficiency in money management. I assume that you have a completed statement of your debts, which you made on the basis of the previous material. If not, go back to it and follow the instructions.

Using the spreadsheet inventory of your liabilities, sort debts by interest rate on an annual basis. In the case of two debts with identical interest rates, their order is determined by the amount remaining to be repaid.

Of course, the mere arrangement of obligations in a certain order does not change anything, if you still pay them all only according to the amount of the installment. The method of getting rid of debt works only if you regularly overpay installments in the established order. Assuming that the contract does not provide for additional costs for overpayment, any amount is good - even several tens of zlotys.

The above table and all the calculations are an example of what the order of payments looks like according to the amount of interest. Do not pay attention to the interest rate on specific products. In fact, they can vary significantly - this is only a simplification.

Your minimum monthly cost is $1,300, but after paying bills and other necessary living expenses, you only have $1000 left to pay monthly installments. This means that soon one of the debts will not be paid on time, which will entail unpleasant consequences.

You have several ways out of this situation:

• Pretend there's no problem. Use the folk wisdom of Poles “somehow it will be” and wait for prompts and new acquaintances from the debt collection company.
• Take advantage of credit holidays. If your cash loan allows you to suspend the loan, for example, for 3 months without additional costs, then this is an emergency solution. Unfortunately, it does not eliminate the problem.
• Generate additional income. Take overtime, go to extra work, give tutoring, etc.

In the case of a deficit in earnings, only the latter works. This is a serious situation, and in order not to fall into a spiral of debt that will turn your life into the “autumn of the Middle Ages”, you need to roll up your sleeves. Credit holidays are only a small helpwhich, depending on the contract, you may not have.

Suppose you manage to earn an additional PLN 200 per month, sell unused equipment for PLN 400 once and keep a cash loan for 5 months. For the next few months, the required installments are PLN 1000 (until the repayment of the first debt), and you now have at your disposal the amount of PLN 1200 after paying the minimum installments.

What does it look like to attack the first debt on the list?

The amount remaining to be repaid - minimum installment - one-time contribution from the sale of equipment - additional cash at your disposal: 1200 zł - 200 zł - 400 zł - 200 zł = 400 zł

After the first month, only PLN 400 remained to be repaid from the payday loan. You no longer have anything to sell, but you still have an extra 200 PLN, so in the next month you pay the payday loan to the end.

From now on, you have an amount of 1200 PLN + 200 PLN (the amount of the payday loan installment), and the sum of monthly installments is 800 PLN (including credit holidays). This means that you managed to overpay 1200 zł on your credit card, and the source dried up. After the end of the deferral of the cash loan repayment, you only have a surplus of PLN 100 - not bad, but not enough to do anything more.

Getting rid of a high-interest payday loan is a good start, but the method has lost momentum and you feel deadlocked again. Although mathematics suggests that this is the best solution, emotions work differently.

Snowball method

The principle is very similar - we continue to attack the debts in a certain order, but this time we change the sorting criterion. We pay in order from the smallest obligation to the largest, without paying attention to the interest rate.

Now the schedule will look like this:

We stick to the previous assumptions - the sum of installments is 1300 zł, every month you have 1000 zł, but you earn 200 zł per month and 400 zł once and you use a vacation from a cash loan for 5 months.

It sounds more complicated than it actually is.

What does the first month look like?

The amount remaining to be repaid - minimum installment - one-time contribution from the sale of equipment - additional cash at your disposal: 1200 zł - 200 zł - 400 zł - 200 zł = 400 zł

After the first month, only PLN 400 remained to be repaid from the payday loan. You no longer have anything to sell, but you still have an extra 200 PLN, so in the next month you pay the payday loan to the end.

You still have a credit vacation for 3 months, and the additional PLN 200 released from the installment of the payday loan helps you to overpay the limit in the account. According to calculations, in the fifth month (the last credit holiday) you have only PLN 100 of liability left, and therefore PLN 450 of surplus on the third debt, i.e. installments for equipment.

Although in the sixth month the credit vacation ends, there is little left of the third commitment, and you have freed much more than the extra 100 PLN from the first method.

In addition to this, you see on your list the debts that you have already overcome, and this gives you an injection of confidence and the belief that you will also succeed with the next ones. I believe it will be so!