Debt Consolidation Loans » financial advice

Why You Shouldn’t Delay Debt Repayment Until Inflation Hits

Staff Writer — Fri, 24 Sep 2010 18:08:40 +0000

The common belief is that inflation benefits consumers in debt because it devalues the dollars being repaid. The borrower, now the debtor, was able to spend the lender’s money at full value but repays is at decreased value due to inflation. If this logic is followed, the higher inflation rises, the better things are for borrowers. However, this is not necessarily the truth.

If the debtor holds any debt with an adjustable interest rate, the repayment will most likely increase with inflation. In addition, if the debtor’s income does not increase at a pace to match the inflation rate, the problem may worsen. Inflation causes the monthly living expenses of the debtor to increase by the inflation rate. If the individual has not received a pay raise, the amount of available discretionary income decreases. In addition, that discretionary income will purchase less than what it did when inflation was lower.

The debt repayment may represent a lower percentage of monthly living expenses during a period of inflation. However, this serves as little solace when discretionary spending power decreases. The only way debtors benefit from a consumer perspective is when their income increases to keep pace with inflation.

Some consumers may even carry the “inflation good” situation so far as to take on more debt during inflationary periods. They do not stop to consider the decrease in their discretionary spending power that could occur. If the individual does not receive a pay increase, he or she may slip even further into debt.

Those who have debts with adjustable rates of interest should be proactive and pay off their debts before inflation hits. Individuals with large amounts of debt should consolidate their outstanding bills into a low-interest rate loans. Anyone in debt should take steps to pay it off prior to an inflationary period to increase their discretionary income.

How Deflation Is Making Debt Worse

Staff Writer — Mon, 20 Sep 2010 20:45:46 +0000

Everyone knows that inflation is generally bad. However, what about deflation? A decline in prices should be good, shouldn’t it? The answer, unfortunately, is no. Deflation is the result of a reduction in the money or credit supply or decreased personal, investment, or government spending. It can result in increased unemployment, declining profits, and increasing loan defaults.

The situation faced by many debtors becomes worse during deflationary times. Falling prices worsen their position because the real burden of their debts is increased. When debt burden rises, debtors reduce their spending. This can actually perpetuate a depressed economy, forcing it into a recession.

During deflationary periods, it is not just prices that fall. Wages experience a decline as well and when coupled with mass unemployment, this means that individuals accept lower wages rather than facing unemployment. Someone with outstanding debt may now be making even less money than before, which can worsen his or her financial situation.

Value is stripped from debtors during periods of deflation. The purchasing power of their debt increases by the amount of deflation. For example, a debtor who repaid a $100,000 debt in a period of ten percent deflation provides a creditor with purchasing power, or value, of $110,000. The debtor is repaying the debt with deflated money that holds ten percent more value than the money that was borrowed.

This difference between value and price is not something that the average debtor considers when paying off debts. The debtor does not even recognize what is happening. The largest debtor in the world, the U.S. government, dislikes deflation because it enriches the creditors, in this case American citizens. Even worse, from the government’s perspective, it robs the government of value. Just like inflation, deflation is harmful to an economy based on debt. Inflation chases money out of an economy, leading to deflation, and the vicious circle continues.

5 Tips for Getting Out of Debt

Shaun Connell — Fri, 21 Aug 2009 15:34:14 +0000

Americans are feeling the credit crunch and that sinking, pitiful feeling of being in debt. But worry not. Here are five easy and quintessential tips that average, hard-working Americans apply that can energize your financial confidence and get out of debt.

1) Credit Crunching

Very simply, tear up those credit cards that don’t give you any discounts. The more you get rid of the better, for the less likely you will use them. Finally, if you’re debt comes from accumulated credit because of interest rates, your best bet is to pay each card monthly by setting aside a savings for that card.

Some cards average interest rates of 21%, which can take quite a toll on your expenses if you do not watch out. So take an overall look at your credit debt and figure out a plan of action for each card, write it down, and carry it out monthly with patience and fortitude, and soon those debts will be a memory.

2) For Big Debts

If you are paying multiple huge debts, refinance a loan with your home as collateral and pay off all the individual debts with that loan. Now all of your debt is portioned into one controlled debt and entity, making it easier to pay off. Of course, be wary of interest rates on loans; anything over 10% will compound your problems and will only trade a small debt for a larger one.

3) Living Expenses

Some expenses such as car notes, groceries, utilities, and other such debt-inducers are easy to fortify if you are willing to make some sacrifices. The reason most people stay in debt, in fact, is because they refuse to change the things that are hurting them financially.

So very simply, if that car note is too much and you can do without it, go ahead and use public transportation, then sell that car for a fair price.

4) Debt Helpers

On T.V. many adds are posted for companies that help get rid of debt. If you’re bold and at your wits ends, go ahead and use these companies. But for safety, call the Better Business Bureau and understand their practices before you apply for a debt consolidation loan, for example.

5) Bankruptcy

A final debt terminator is to file bankruptcy with your attorney or a local attorney of your choosing. Although most Americans cringe at the thought of this, it really can decrease your likelihood of incurring more interest-based debt, and removes the previous debt.