Debt is dangerous. It’s often necessary to take out loans, particularly during the early stages of your career, but the risk is that debt can run your life for you- in all the wrong ways. Anyone who’s ever been through the debt recovery process can tell you that it’s scary, and nerve-wracking in the extreme.

The debt trap- Needing to borrow

When you need to borrow, it’s more than likely the amount you borrow will be at the upper end of your ability to manage the loan. People naturally tend to borrow to cover expenses they’d rather not pay upfront, for various reasons, usually related to budget and other financial commitments.

Even smaller amounts of borrowing can throw a lot of spanners into the works under these circumstances. If you’re on a low or fixed income, repayments can sneak up on your budget, particularly during the bill paying periods. The result is that you’re perpetually short of cash, and possibly needing to borrow more just to cover expenses.

That’s not where you want to be. It’s a vicious circle, and it can get worse. Under those circumstances, any additional expense can trash the budget and leave you significantly worse off, going without things you need. It can also put an end to any sort of social life, soaking up your cash before you get it.

Preventing debt problems before they happen

There are several options, however, for organizing your borrowing into a manageable state before you even apply for a loan. Professional debt collectors will tell you that the whole secret of borrowing is simply making your loan manageable.

Ironically, one of the major problems for borrowers is borrowing on terms that look like the loan can be repaid quickly. That’s a nice idea, and it works if you can actually do that, but it also means paying more, in a shorter time frame. This is usually where the problems start, and it’s a scenario to be avoided.

For example, this is how not to manage a loan:

If you borrow $10,000 and agree to pay it all back plus interest in 10 months, the loan repayments are $1000 per month plus interest. If your budget is $2400 a month, including $1000 a month rent, you’re trying to live on roughly $300 or so per month, or $70 a week. Any bill can sink this budget.

The probable result is that a lot of the $10,000 will get eaten up just covering expenses, and you may even have to use some of it for repayments. That means you’re literally just playing post office with the money, and paying for it.

The alternative:

The same loan, paid back over 2 years, would figure out as about $600 per month, including interest. You do pay more interest, yes, but your budget under this repayment scheme would be in no danger. You’d actually have a lot more spare cash.

The moral of the story?

Plan before you borrow.

Make sure you’ve got all the angles covered.

It pays off, well.