Ummh, a little debt won’t hurt, or it won’t hurt much! Well, everyone in debt distress once said that, and over time, they are struggling to find their foot financially.
The main disadvantage of debt financing is that interest must be paid to lenders, which means that the amount paid will exceed the amount borrowed. Here are 10 reasons why debt is bad for you.
Debt Encourages Out-spending your Income.
When spending borrowed funds, people do not always feel the same sense of responsibility and frugality as like when spending received earning. There is something about the debt that tempts you to keep spending even when you cannot afford the payments. Part of the allure of debt is the fact that you can get the emotional high from getting new things now, without having to deal with the immediate pain of parting with money. It can feel like you are getting something for nothing. But eventually, that spending will catch up with you, and it won’t feel so good then.
Debt Financing Borrows From Your Future Income to satisfy the Past or Present.
Taking a loan is simply using up money yo are yet to earn! You stretch your hand into the future, take and consume something you are not even fail-proof sure will be earned.
Debt Costs you more Money.
The main disadvantage of debt financing is that interest must be paid to lenders. Debt feels free when you are swiping your card or signing loan documents, but this is an illusion. In general, you pay a price for the debt you create. That price comes in the form of interest. The higher the interest rate, the more you’ll end up paying for your debt. Also, the longer it takes you to pay off and the higher your debt load, the more interest you’ll pay.
The only exception is an interest-free loan or zero percent APR credit card promotion, but even that has a limit and can be lost if you default on your payments.
Of course, if you use a credit card and pay off your balance on time and in full every month, you won’t have to pay any interest.
Debt Can Hurt Your Marriage, Family and Other Relationships.
Debt puts unnecessary pressure on the household’s finances and creates a lack of financial security for your spouse and your children. When both partners feel overwhelmed, it can spark arguments about spending habits, who is creating more debt, and how much debt is too much. These fights can escalate and lead to a breakdown in the marriage.
Debt Prevents You from Reaching Your Financial Goals.
A financial goal is a target to aim for when managing your money. It can involve saving, spending, earning or even investing. Debt service payment (monthly) tampers with the amount available to you and therefore your financial purchasing power. The debt itself can easily be a long-term goal, depending on how much debt you have, but getting rid of this debt is vital to securing your financial future and building your net worth. Compound interest builds rapidly over time, making it harder to get out of debt.
The more debt you accumulate, the higher your monthly payments will be, and the less you have to spend on everything else.
High-Interest Debt Causes You to Pay More Than the Item Cost.
If you buy a N2,000 car on your credit card at 11% and only make the minimum payment, you will have to pay more than N3,600 by the time you completely pay off the debt. That’s N1,600 more than the furniture cost. Even if you were to raise your monthly payment to N100 and pay off the balance, you’d still pay close to N220 more than the cost of the furniture. On the other hand, you could set aside N150 a month for 14 months and pay in full at no extra cost.
Debt Can Keep You from Owning a Home.
Debts as credit card, auto, and student loan are all considered when you apply for a home loan. If your other debt payments are too high, you may get turned down for a mortgage loan. In most cases, your total monthly debt payments can’t take up more than 43% of your income if you hope to secure a mortgage. Many lenders want that number to be even lower. That means you may never be able to own a home.
Debt Can Lead to Stress and Serious Medical Problems.
When a person is indebted, it becomes difficult to focus on your health and well-being, even most times, debtors descend into worrying and depression.
Some debtors have even been reported to commit suicide. The stress from debt can lead to mild to severe health problems including ulcers, migraines, depression, and even heart attacks.
Debt Affects your Personal Productivity
Carrying a lot of debt can wreak havoc on your personal life, and it can also have even more impact on your work life. From limiting the kinds of jobs you can work on, to destroying your ability to focus at work. Debtors often find themselves spiraling downwards in productivity as their debt burden increase.
Debt Hurts Your Credit Score very Badly
Debt evaluators 30% to be exact based on the amount of debt you have. The more debt you have weighed against your credit limits and original loan balances, the lower your credit score will be. Even if you’re not shopping for a credit card or loan, your credit score affects your personal wellbeing immensely.
While borrowing is not a crime, and can even be a smart financial decision, it is often best to stay away from indebtedness, especially when purpose of borrowing is focused on consumption and not returns yielding investments.