Poles in a credit spiral
We live on credit. Mortgage obligations, installment purchases, loans in parabanks, make the total debts of Poles reach billions of zlotys. As long as loans are taken responsibly, there is nothing wrong with that.
Commitments in financial institutions mean that we can afford more in our lives, e.g. our own apartment. However, when the debt gets out of control, and falling into a credit spiral becomes a fact, then we get into serious trouble.
How indebted are Poles?
Data from the Association of Polish Banks indicate that the debt of Poles is large and its structure is diversified. At the end of 2016, over 15 million citizens were burdened with at least one loan, and the average debt of Poles amounted to almost USD 40,000. In total, this gives almost 580 billion debts. Debt is also showing growth dynamics.
In annual terms, this increase is about 5% in nominal terms. Given the record low inflation, in recent years debt has also increased in real terms. Statistics also indicate that the amount and sum of overdue or unpaid debts is increasing.
In the first quarter of 2017, the total past due debt of Poles amounted to approximately USD 23.5 billion, so that in the fourth quarter of 2017 it would be at the level of USD 25 billion. An increase in past due debt by USD 1.5 billion (6%), within a few months indicates that the problem with the credit spiral in Poland is increasing.
Who and how is it in debt?
Gender correlates very closely with the amount of overdue debts. Men who have about 19 billion of them have much more debt, with about 6 billion on account of Polish women. Unfortunately, unpaid alimony from fathers is still a huge financial and social problem. On average, a maintenance debtor owes nearly USD 40,000 to his child.
In the general awareness of Poles, mortgages are the most common reason for having overdue financial liabilities. Statistics show, however, that this is a fairly misconception.
The most common reasons for having overdue debts are loans, telecommunications contracts, e.g. unpaid phone bills and consumer loans. The amount of debt is also related to age. Most often, 30- and 40-year-olds struggle with debt, but more often, 20-year-olds, and even young people, struggle with credit problems shortly after reaching the age of majority.
How not to get into debt?
Debt, especially overdue debt combined with penalty interest can put the debtor in huge trouble. Let us remember, however, that a skilfully made financial commitment can bring many tangible benefits. After all, companies, large corporations, and even entire countries take out loans of various kinds, and this generally brings them many benefits. After all, credit enables us to significantly expand our consumption possibilities. For example, hardly any young Polish family can afford to buy a house or apartment without credit support.
However, any potential financial liability carries a risk, so you should carefully consider taking out any credit or loan. First of all, one should remain vigilant, limited confidence and be guided by rational premises instead of emotions. The basic principle, which still seems to be disregarded by many Poles, is distrust of advertising.
It is desirable, however, to read the contracts carefully (which the vast majority of us do) and use a calculator to calculate the actual cost of the loan. In short, in financial matters, especially debt, it is worth estimating the risk and always keeping your feet firmly on the ground. Only this approach will minimize the risk of getting into financial trouble.
What is a credit spiral?
The credit spiral consists of indebtedness to pay off previously incurred financial liabilities. It works like a snowball, we just take out more loans and our liabilities are still growing. What’s more, each subsequent loan is getting harder and harder to take because our ability and financial credibility are decreasing.
Over time, we use, for example, the services of non-bank institutions (parabanks) and very high-interest loans. If we do not react properly then, we will end up with huge debts and the inability to take any loan to pay them off.
It is easy to fall into a credit spiral because of your recklessness and overestimating your ability to pay back financial obligations.
However, credit problems also fall due to random cases. A serious accident or illness, loss of a well-paid job, legal and economic changes (e.g. an increase in the Swiss franc exchange rate a few years ago) can mean a significant reduction in income and a lack of financial resources to repay your financial obligations. Fortunately, even against such cases, you can protect yourself, e.g. by investing in a solid insurance policy in the event of a serious illness.
What not to do during financial problems?
However, if we already have serious financial problems, we still have a chance to get out of them. It can be difficult, require sacrifice and patience, but most importantly it is doable.
The basic principle is: Don’t get into debt any further.
For example, if your monthly income is USD 5,000 and your total monthly expenses (installments, loans, living costs) are USD 8,000, then incurring another financial liability in the long run will only lead to more trouble.
Equally important, you can’t break down with your troubles.
Financial problems, a decrease in the standard of living, uncertainty of tomorrow are a source of great stress or family problems. However, especially in this case, an action plan should be developed and implemented and then patiently implemented.
How do you get out of the credit spiral?
First, you should analyze your income and expenses, and evaluate your lifestyle financially. Changes in your life can be difficult, but they can also save you a lot of financial resources every month. To get out of financial problems, our income should simply be higher than expenditure.
It is worth remembering that quite often reducing expenses is easier than increasing income. However, if you have financial problems, increasing your income should also be a priority. A hike or a change of job can also help us overcome financial problems.
In the case of really serious financial problems and huge debts, you should consider selling your assets. Replacing a flat with a smaller one or selling your car may be unpleasant, but sometimes necessary. If we do not do it in time, then in the long run we can lose our property at a much lower price. Increasing interest and costs of bailiffs will then burden us even more.
Even worse, the bailiff usually sells assets at a much lower price than the market price. At the first bailiff auction, real estate and movable property are auctioned at 2/3 of the estimated value, and at the second after half of the estimated value. As a consequence, a car that we could sell for USD 50,000 alone can be sold at a bailiff auction for USD 25,000.
Consolidation loan and consumer bankruptcy
Taking another loan in order to be able to pay off earlier obligations is a bad idea. However, restructuring your debt is generally a great idea. If you are burdened with several loans and the amount of monthly installments exceeds your financial capabilities, then it is worth taking an interest in a consolidation loan. The consolidation loan is intended to pay off all previously drawn loans.
After its incurring, the debtor has only one loan to repay, which generally extends the repayment period significantly and has a much lower interest rate than the liabilities originally incurred. A consolidation loan can therefore help a lot out of a difficult financial situation. However, it should be remembered that banks offering such loans often require collateral, e.g. mortgage.
If you fall into a really serious spiral of debt, you should also consider the possibility of announcing the so-called consumer bankruptcy.
This is a legal proceeding of insolvent natural persons who do not conduct business activity. Consumer bankruptcy is the cancellation of part or even all of a person’s debts. However, you should be aware that if such bankruptcy is declared, some or even all of the debtor’s assets are liquidated. The funds obtained are intended for satisfying creditors’ claims, and the plan and manner of their repayment is established by the court.