How consumers avoid the debt trap

Taking out a loan today is cheaper than ever before. Interest rates are at a record low. This not only pleases borrowers but also creates worry lines among savers. Various banks are now thinking out loud about possible negative interest on larger savings. That would be a fee for having the money parked in the bank. For this reason, people spend significantly more money now than they used to.

That is precisely the goal of the European Central Bank’s monetary policy. Extremely low-interest rates are intended to encourage people to consume more. As much money as possible should be put into circulation, which in turn boosts the economy. Quite a few economic experts from abroad complain that the Germans are still under-indebted. If we bought more on credit, the bottom line would be that borrowers would also spend more.

But every loan always comes with a repayment obligation. So if you take out a lot of consumer loans, you will soon have to put a whole lot of money into current liabilities every month. It is therefore important to keep a good sense of proportion and protect yourself from the debt trap.

What exactly is “the debt trap”?

What exactly is "the debt trap"?

A debt trap is the danger of over-indebting yourself through too many loans or too high a loan. You are over-indebted if you do not have enough income to service the monthly liabilities.

The iff Debt Report 2019 has summarized the biggest risks of overindebtedness. These look like this:

  • Unemployment is the cause of overindebtedness in 23.1% of all cases
  • Separation and divorce are the cause of over-indebtedness in 10.7% of all cases
  • a serious illness is the main culprit in 10.0% of all cases
  • in 9.7% of all cases, it is the consumption behavior of the over-indebted that is the reason

This puts the topic of consumption in fourth place. The question remains, what to look for in times of 0% financing if you want to avoid the debt trap. One option for loans is the so-called residual debt insurance.

Five tips on how to prevent the debt trap

Five tips on how to prevent the debt trap

Saving is out today. What for, because bringing money to the bank no longer delivers income. Many people are of the opinion that money could simply be spent directly. In addition, consumers no longer have to make huge savings today. With 0% financing, you could buy the things you want. Later, you save the purchase price with your monthly loan installment.

In many cases, this can be a really good thing. For example, anyone who is in an emergency can react quickly in the event of a defective washing machine. But ultimately there is always the risk of buying things that you do not need or cannot afford. Getting a loan has never been so easy. We have summarized five tips here about how you as a consumer can avoid the debt trap.

  1. Make sure that you really need the property you are buying.
  2. Can you actually afford the loan?
  3. Are costs and benefits in a reasonable relationship to each other?
  4. Be honest with the credit check.
  5. Check regularly whether debt restructuring could make sense.

Make sure you really need the property you want to buy

money

Would you like to buy a new cell phone or a new computer? You have not yet saved the money required for this. The electronics provider beckons with an ideal offer. The device is reduced in price and 0% financing is possible.

If you take out a loan to buy a luxury item, you should carefully consider whether you really need it. Alternatively, isn’t there an option to do without the article first? Then the money could be saved over time. A loan with 0% financing is a kind of savings, but only in part.

For example, suppose you take out a loan of $ 1,000 when you buy in installments. The term is 24 months. You have to pay an average of $ 41.67 to the lender each month. However, this only assumes that there are no interest or other fees.

If you save the same amount for two years, your balance at the bank increases and after 24 months stands at 1,000 dollars. The difference is that in the event of a financial bottleneck, you can pause the savings for two or three months. This only shifts the time at which the full 1,000 dollars are available to you.

There is also the possibility of still freely disposing of the money. In the unlikely event of an exceptional situation, the money is at your disposal. Anyone who becomes unemployed or seriously ill would find a luxury item to be of secondary importance anyway.

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