Tag Archives: Debt

[Research] Plunging Back Into Debt

Research In India & Philippines Shows How People Fall Back Into Debt

When everyone has so much debt that they live from paycheck to paycheck being debt free is the new form of being rich these days.

Many people dream of the day they can say they have paid off all their debts and finished their debt review. Why?

‘being debt free is the new form of being rich’

It seems that many consumers only want to finish debt review simply to plunge themselves back into crushing debt slavery. This is commonly seen when former debt review consumers call their past Debt Counsellors complaining that the NCR database and Credit Bureaus are not swiftly updated to show them as out of debt. They find this out because they have quickly run to the nearest credit provider desperate to head right back into debt.

Research

Some very interesting research conducted in 2007 and 2010 (by researchers at Harvard, Chicago Booth and Northwestern University) in India and the Philippines (over a period of several years) shows how many consumers are only too eager to take on more debt even after they have previously been trapped in a debt spiral.

The idea was to observe three groups of indebted people (mainly small low-income business owners who were self-employed). One group would be the control group who just dealt with their debt as best they could without any interference or help. The second group would receive financial education and the third (and perhaps most interesting group) would have their debts settled.

These small lower income business owners would then be asked over time to relate how their financial situation was going over a period of several years.

They Had Their Debts Paid Off For Them

For the very fortunate Group 3 (the ones who got their debts paid off for them suddenly) this often meant that because they did not have to pay the instalments and interest portion of their many former debts that they effectively had twice the money they did before each month. This was, as you can imagine, a significant change in their lives.

Two Years Later

Here is where it gets scary. After two years the amount of debt that Group 3 had (the ones who had all their debts paid up) had gone from zero up to the same amount as those in the control group. Most of those who had their debts paid off for them actually went back into debt within 6 weeks of being out of debt.

When it came to saving, none of the three groups did very well at all. Hardly any of them were able to save anything whatsoever. Not the business owners who had their debts paid off for them (group 3) nor those who had been given financial education.

True, some of the participants had been hit by sudden financial emergencies that they borrowed to deal with and others had taken on debt to grow their businesses but after 2 years neither of these subgroups had made any significant effort to get out of their new debts, effectively leaving themselves enslaved to their credit providers once more.

Can We Learn From This?

If you are in debt review and working your way towards getting out of debt then start to plan how you will save once you are done (not spend). Avoid thinking about running out and buying big ticket items until you settle into your new financial situation. Give it a minute. Why not carry on saving the funds you had been using on your debt review for a few months to build up a financial safety net?

If you are thinking about buying a new car once your debt review ends, for example, plan on saving the future car instalment amount for a number of months to build up a nice deposit or save for longer and even look to buy a second-hand vehicle cash. Yes, this might take you many months before you can get that new car smell (they have it in a can and spray it into the cars on the show floor each morning), but you will be able to avoid been stretched too thin financially once more.

Why not carry on saving the funds you had been using on your debt review for a few months to build up a financial safety net?’

Try to avoid quickly plunging yourself back into the bad situation you were in that left you stuck paying debts for years and years.

We have to learn from our past mistakes or we are destined to repeat them.

 

 

Cartoon: Student Debt

Student Debt Cartoon   This cartoon by Randy Glasbergen rings all too true about the state of student debt. In SA, at present, there are two sources of student loans that are commonly used: (1) Government-backed National Student Financial Aid … read more