Most of the debt is accumulated in the form of cash loans and credit cards. To avoid becoming a debtor, you need to take care of minimising risks in advance. It is also necessary to ensure financial stability.

What happens if you don’t pay the loan?

Increase in the amount owed

When a borrower defaults on a loan, the lender imposes a penalty, interest or all together. As a result, the total amount owed increases.

Decrease in credit rating

Failure to pay your loan on time negatively affects your credit rating. Persistent delinquencies make it difficult to get new loans. The borrower is deprived of the opportunity to refinance loans and deal with debts.

Pressure from debt collectors

A creditor may transfer a debt to a collection agency. Collectors constantly write and call demanding repayment of the debt. This becomes a source of stress for the borrower.

Loss of property

If the loan was secured by collateral (such as a flat or car), the creditor has the right to keep the collateral to cover the debt.

Court proceedings and bailiff restrictions

If non-payment exceeds 90 days, the creditor can go to court to collect the debt. According to the court order, bailiffs will have the right to seize accounts and assets, prohibit travelling abroad, withhold part of the salary and sell the seized property. If the borrower has no money to repay the debt, he is declared bankrupt.

First symptoms of financial difficulties: identify and solve the problem in advance

Decreasing financial reserve

If you have to spend part of your reserve or withdraw money from your savings account, this is a worrying sign. Even if you’re confident you’ll recover the loss with your first paycheck, you’ll need to analyse the situation. You may have used the reserve to pay for an unexpected expense (like replacing a broken refrigerator) or to pay expected bills (like utilities or annual insurance). The first situation is normal; these are exactly the kinds of things you need a financial cushion for. The second is a sign of a future crisis.

Increase in % of credit load

The cost of repayment of all loan obligations should not exceed 25-30% of income. This parameter needs to be monitored. If income decreases or credit load increases, the balance is lost.

Non-payment of obligatory payments

If you pay your loan on time, but you have arrears on your rent, it is clear that things are not going well. Take care to monitor your personal finances in the first month you can’t pay all your regular bills.

Credit card abuse

A credit card should be used to your advantage. For example, for big purchases at seasonal sales or to save with rewards programmes.

Increasing your credit limits

If you’ve maxed out your credit card for small amounts in the past and now need a higher limit, it’s a reason to review your financial plan and tighten control over your spending.

How to reduce the risk of debt and other financial problems in advance

Don’t ask for credit if you don’t have more money to spend

Before applying for a loan, build up a financial reserve. Remember that a financial reserve is meant for crisis situations and should not be spent until the loan is fully repaid.

Plan your finances

Keep track of your finances and plan your expenses in advance. This will help you avoid unnecessary expenses and ensure that your loan is repaid on time.

Calculate your loan load accurately

Ensure that your loan repayments do not exceed 35-40 percent of your income. Calculate your loan burden accurately, without rounding up, taking into account all interest, fees and associated costs such as compulsory insurance.

Pay a little more up front

It’s not about paying early. To avoid late payments, pay off your loan 2-3 days before the due date. Also, transfer a little more than necessary to your loan account to build up a safety reserve.

Solve problems together with the bank

Delinquency is a common problem for the client and the bank, so you need to solve it together. You may be offered a credit holiday, refinancing or renegotiation of the terms of the agreement (change of the term or payment schedule).

Don’t forget to pay

Schedule reminders for payment dates or set up automatic debits from your bank account.

Ask for help

If a problem escalates and you can’t solve it on your own, hand over the management of your credit and personal finances to a professional so they can resolve the problem with minimal disruption.