A debt loop, or a spiral of debt. One of the main rules for payday loans, non-bank loans is that you do not borrow to pay off another loan. Why? An editorial over at http://ainktm.com
Repaying the loan with another loan leads to the creation of the so-called debt loop, and this is already a step away from total insolvency, which may cause bailiffs to be executed. What the appearance of the debt loop looks like is shown in the following example:
Loop debt example
Let’s assume that the consumer borrows money in one loan company for 30 days to settle the debt in another company. Then he lends in the second to settle in the first. The loan is entirely intended for the repayment of the previously drawn loan. Savings costs, which were accepted for simulation, amount to approx. 15% of the loan value. They are, nevertheless, a small cost, especially since many loan companies charge much larger commissions, even exceeding 30%.
It would be even more possible to calculate the simulation of the loan and its repayment, but this is not necessary, because the above example fully, clearly and clearly shows what the consequences of loan lending can be. You do not need much to fall into the debt loop. This is a relatively low level of costs for the loan, because it does not exceed 20%, and yet there are companies where the percentage of total costs to the loan is much higher.
A debt loop is a very bad situation for a borrower. We can fall into big financial problems not only by lending a few and often, but also by using bank loans. The situation in which we do not have money for a loan installment and we save ourselves by a non-bank loan will lead to the same. In this case, it is definitely a better idea to renegotiate the terms of the loan agreement or use the option of loan consolidation (especially when we have several bank liabilities).
Therefore, it is necessary to carefully estimate the possibility of settling liabilities in a timely manner. It is impossible to say 100% that nothing will happen that would adversely affect the repayment of the loan. Therefore, when borrowing a loan you should not only take out an amount no more than necessary, but also be aware that repayment of a loan with another loan or loan may lead to a lack of solvency.