Over-indebtedness: a concept that is often talked about but little known about. Only one thing is known for certain: nobody wants to be in this situation.
But what exactly is over-indebtedness? To give an answer we have to take a step back and understand what debt is.
When you take out a mortgage, apply for a loan to buy a car or take out a loan to renovate your home, you go into debt. It is not a word that must be frightening, on the contrary: it is a very normal condition and for which one must not worry. Getting out is simple: just pay all the installments required to pay off the loan.
The problem begins when from an indebtedness condition we switch to an overindebtedness one, which the European Commission defines as follows: “temporary or permanent imbalance in the family’s assets, resulting from an expected or unexpected increase in expenses or, vice versa, from decrease in family income. “In other words, indebtedness occurs when a person (private or business) who has a debt to third parties does not have the resources to pay the installments necessary for its repayment.
The reasons for over-indebtedness
Not doing the math well and spending more than what you earn, leading the outputs to be higher than the income, and sudden changes in income (for the most disparate reasons: loss of job, marital separation or the onset of an illness) are some of the more frequent reasons for over-indebtedness.
There is another reason that can lead to this condition: the too high rates inherent in certain forms of loan. Some banking products, such as revolving cards, are attractive because they require fewer guarantees from the customer and are therefore more accessible, but their interest rates are very high.
In short, the ease and availability of certain types of loans hide rates on the edge of usury which favor over-indebtedness.
How to avoid the risk of over-indebtedness?
The solutions to not get overindebted exist.
First of all, to avoid running out of resources when the debt is not yet extinguished, carefully plan the management of your finances. Concentrate on the necessary expenses, identify the average cost of each trip (food, clothes, bills, free time …) and establish a budget: having full control of your money will help you be more serene and cope with any unexpected events. Consider that the monthly fixed expenses should not exceed 50% of the income: 30% must be destined for rent or mortgage, the rest for all other expenses, from those for basic needs up to reimbursements of the installments of the loans.
If your expenses exceed 50% you are in a risky position: the weaker you are from a financial point of view the more the loan will cost you dearly, because interest is also established on the basis of the debt rate of the applicant.
In addition, it is essential to protect yourself as much as possible when applying for the loan. Always check all the contractual rules and repayment terms and beware of too easy solutions: if the requirements for access to the loan are not very demanding, it is probably because the interest rates are decidedly high.
No finance company should put borrowers in conditions of over-indebtedness.
Credit was not born to make people’s lifestyle worse, but to improve it; it must not cage in its mechanism, but it must be the instrument of an honest and ethical type of finance. A finance always on the side of people.