Low interest rates, living from first to first, low economic awareness and the roll-over of cash loans while reducing the level of disposable income at household level are the main factors behind the emergence of the debt spiral. In the article, you’ll learn about the critical moments in the debt spiral when it is worth starting a full debt restructuring to avoid taking over collateral.
Best practices for monitoring the spiral of debt
It is to track the DLT ratio, i.e. the ratio of debt servicing costs to income generated. If the DLT ratio begins to exceed 30 – 40%, it is a signal to reduce household expenses and take corrective action. Above 50 – 60% you are practically on the verge of solvency. Another crisis moment is taking out a cash loan to pay off other loans. This situation is only acceptable if the assets are stable. Accumulation of debt is not a good solution because a random event in life makes it impossible to pay the debt efficiently. If you have several loans to handle, it is better to transform them into one consolidation loan. Debt consolidation is the basic method of counteracting economic crises. If the disposable income decreases, it is worth limiting expenses and closing short-term loan agreements at all costs. In this way you will bring the budget to balance. Remember that credit is cheap at low interest rates, while the problem of additional costs increases as interest rates rise. This problem progresses when you take out loans in foreign currency. When you exceed the critical value of the DTL, virtually every lender will cut off funding and ask for repayment of existing contracts. Ongoing monitoring of your creditworthiness is extremely important if you use many types of debt at the same time.
Debt spiral is a problem for many consumers
For those who are not interested in testing their own creditworthiness and often even stretch their payment dates. The debt spiral always leads to financial exclusion and to total insolvency.