“After reading your article about bad debt last week, I realized that I’m trapped in a cycle of debt. I have been taking our loans over the past six years. Each time I clear off an old loan, I borrow even more money which typically is used to purchase some unnecessary household item. I now owe about three times what I did when I originally started borrowing. Please help me to break free of this debt!”

The current growth in consumer debt has its pros and cons. On one hand, it’s great for the economy, as profits of the lending agencies and retailers increase when people’s appetite for debt grows. However, on the other hand, there are more reports of consumers who are suffering under a debt burden that they find hard to bear.

As we have been discussing recently, there’s ‘good’ debt and ‘bad’ debt. Debts that are financially beneficial are those that can provide you with some monetary advantage in the future; while borrowing to sustain a lifestyle that’s beyond your means will definitely lead to financial challenges.

So if you’re stuck in a cycle of spending and debt, what can you do to break free? Follow the steps below to start your journey towards freedom from debt.

1.   Assess Your Debt Situation

The first step in getting rid of your debt burden is to assess exactly how bad the situation really is. What kinds of loans do you have? What are the balances that you owe? What interest rates are you being charged? What is the time period you have left to repay the loans? Do you have any assets or collateral backing these loans? Use a simple form to keep track of your debt. Taking stock of your debt position will help you to plan your next steps.

2.   Find Extra Money To Pay Down Debt

Using your budget planner, examine your current income and expenses and try to free up some extra money to increase your debt repayments. You may have to make drastic changes to your lifestyle for awhile until you have your debt under control. For example, you could suspend your cable or internet connection temporarily, or cut back on your entertainment or personal care.

You can also consider options for earning extra income. Even a small increase of J$2,000 per month towards your loan could cut down your repayment period and interest costs significantly.

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3.   Decide which loans to pay down faster

If you have several loans, rate them according to the remaining balances, by placing the ones with the smallest balance first. If you have debts with similar sizes, put the ones with the highest interest rate first. Pay at least the minimum required on each debt, but use the extra cash you found in step 2 to pay more on the debt ranked #1. This way you will pay off the debt with the smallest balance faster.

When that loan is repaid, take the full amount and apply to the debt that was next in the ranking. Ensure that you do not ignore any of your debt repayments! Many people have had their loan balances balloon from a manageable amount to a large debt just from penalties and charges incurred from missed payments.

4.   Consider debt consolidation

If you are overwhelmed with many high-cost debts such as credit cards and payroll loans, you could attempt to consolidate them under a lower cost loan option. Some institutions offer cash-secured loans at cheaper rates. Even if you don’t have the cash required, you could ask supportive friends or family to stand guarantee by using their accounts as collateral for the loan. Don’t be afraid to go to your lending agency to ask about lower cost loan options.

5.   Change your attitude about debt

Think about how you got into debt in the first place. Many people get trapped in a debt cycle by first borrowing from others to make up a shortfall. Then as their appetite for debt increases, they may turn to credit cards or hire purchase financing to buy things they want but their income doesn’t afford. Before they are even aware, the cycle escalates to borrowing from lending institutions through expensive payroll loans or high priced micro financing.

Before taking on any more unnecessary debt, consider this: the money that you will be paying out in loan interest over the years can add up to a significant sum. Instead of making the lending agencies richer, decide to use this money to invest towards your financial goals.

Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.

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Originally published in The Daily Observer, April 26, 2007

Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl