Additional Debt Will Not Solve The Problem Of Too Much Debt
I’m subjected to commercials from Western Sky Financial whenever I watch the Retro TV channel. These advertisements are targeted at people who take out payday loans. The typical payday loan customer rolls over the loan repeatedly, racking up hefty fees, before paying it off or defaulting. Western Sky admits that their money is expensive. But they point out that it costs less than payday loan fees, and they will loan the payday debtor enough money, up to $5,000, to finally get over the financial hump and off the payday loan treadmill. In other words, they propose that more debt is the solution to the problem of too much debt.
Debt is a symptom, not the real problem
As we’ve noted before in this blog, debt is but a symptom of the real problem which is a lack of savings. And a lack of savings is the result of spending more money than is earned. Until spending is addressed, there will be no savings, and debt will continue to be a burden.
Adding more debt does nothing to solve the problem of too much debt. It simply puts off the day when the debtor will have to take action to deal with overspending and a lack of savings.
Adding more debt makes things worse
More debt will actually make the problem of too much debt worse, even if the debt is restructured, because the cost of the debt (interest) will increase. Spreading out debt over time adds to the cost of interest.
Even if the debtor gains some positive cash flow that he could subsequently add to savings as a result of taking on more debt to restructure the old debt, he will likely overlook the opportunity to save, thinking he has his finances under control. The pressure is off for the moment. The incentive to reduce spending and save is gone. He may even use the extra cash flow to take on additional debt payments.
Evaluating the Western Sky solution
So how does the Western Sky offer measure up? Here’s an example: Say you were struggling with a two-week, $700 payday loan that you had rolled over a couple of times. Each roll over cost you $160.18 in fees and interest ($320.36 total, so far), and you haven’t been able to pay anything on the principal. Western Sky has a $1,500 loan product structured as follows: $500 loan fee, APR 234.25%, net loan proceeds $1,000, 24 monthly payments of $198.19. That $1,000 will allow you pay off the payday loan with a little cash left over. The $198.19 payment per month is a lot better than shelling out $160.18 every two weeks in fees. The interest rate of 234.25%, while outrageous on the surface, is about half the going interest rate for payday loans. The Western Sky offer does sound like the solution to your problem, doesn’t it? But wait! Total those monthly payments. Yep, your total payback over 24 months is a staggering $4,756.56. How can that be a sound solution to a $700 debt problem? It’s not. The Western Sky solution does nothing to change your financial situation except to add a lot more debt.
Don’t panic. Take action.
If you find yourself overwhelmed with debt, don’t panic and immediately take out another loan. Try something different. Address the spending problem. Be honest and evaluate your options. What expenses can you eliminate or reduce until debt can be paid down to a manageable level? Contact local relief agencies to determine if they can help you with food and/or utility expenses? Can you move in with a friend or relative to reduce housing expenses? Can you take on some extra work such as housecleaning, babysitting, house painting, distributing handbills, yard work, hauling rubbish, freelance services, or a second job? Do you have any possessions that can be sold without consequence, in other words, items that you no longer need? Contact an agency such as Consumer Credit Counseling Service for help in dealing with creditors and money management. In short, do all that you can to answer the following question before you consider another loan: Is it possible to come up with enough money to get your debt under control?
No easy way out of debt
I understand the actions suggested above may be difficult to undertake. They may make you uncomfortable, as well. The easy way out would be to take on more debt and put off the day of reckoning a while longer. But now or later, you will have to drastically reduce spending to pay down debt. The longer you put it off, the more challenging it will be to cut spending enough to make a difference. The hard truth is, you can’t begin to solve a debt problem until you quit taking on new debt.
Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages
