Spiralling debt and how to escape

An increasing issue in the UK and across the European Union is the growth of high-risk credit and short-term loans, often called “payday loans” as they are marketed to give people an advance until the end of the month when they are paid.  These services are generally aimed at the poorer members of society, who are unable to take out longer-term loans due to poor credit histories, and who are most likely to need fast access to money to pay bills or buy essential goods.

While these services provide a lifeline to some, this comes at a cost.  The major warning coming from companies like North Shore Advisory is that, the interest rates charged on these loans is generally very high, to offset the risk to the loan provider and the short period of time the loan is taken over.  A loan from http://www.wonga.com for £200 for fifteen days results in a total payment of £235.90.

Paying £35.90 to get access to money to pay for food may seem fair, but as stated above these description loans are aimed at the poorest in society, to whom £35.90 may represent a significant sum.  It is likely that a number of those taking out this type of loan will find it difficult to pay off the full loan at the end of the period, and companies exploit this by offering further loans to cover the fees, and increasing the amount that can be borrowed.  Therefore, individuals can find themselves trapped in a spiralling debt problem, having to take on an increased loan the following month to pay off not only the £200 borrowed but also the charges of £35.90.  Borrowing £236 for fifteen days would cost £277.23.  Borrowing £278 for fifteen days would cost £325,44.

There have been a number of campaigns launched to spread awareness of how personal installment loans can lead to long-term debt difficulties.  However, this spiralling debt issue does not only apply to individuals.  Entire countries have borrowed considerable sums and must maintain interest payments in order to remain solvent.  The US, for example, must pay over $400 billion in interest each year – or borrow further sums to pay this off.  In some cases, countries have found themselves unable to pay the interest or repayments needed, where the debts have become a large part of GDP, and have needed international bailouts to continue.  Debts of a number of developing countries have been wiped as it was recognised that interest payments were preventing them from growing and paying off the loans.

How can individuals or countries escape the debt spiral?  Moving to lower-priced finance, with lower interest rates, should be a first concern; spending (and therefore borrowing) less is also crucial.  However, convincing the electorate of a country of the need to implement such cost savings can raise its own political problems …

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