Financial services have become an integral part of modern life. A loan can be used to solve urgent household issues, start a business, or get an education. However, improper handling of credit obligations can lead to a so-called debt pit.
This is the name given to a situation in which a borrower is unable to fulfill his or her obligations, for example, to pay off all microloans from an MFI or bank loans. This scenario can be avoided by following a number of professional recommendations and understanding the legal aspects of lending in Ukraine.
What is a debt hole and how to avoid it
A debt hole is a situation where a person is forced to take out a new loan to repay the previous one. As a result, a “snowball” of debts is formed, which eventually becomes unbearable. The main reasons for its occurrence:
- unreasonable borrowing;
- lack of financial discipline;
- low level of financial literacy;
- Ignoring the terms of the loan agreement.
In order to avoid falling into a financial trap, it is necessary to initially approach lending as a serious financial instrument, not an easy way to get money.
Rules for responsible borrowing
Developing healthy credit behavior is the key to financial stability. Before signing a contract, you need to go through several logical steps, each of which minimizes risk.
Here are the basic rules of responsible borrowing:
- assess the need for a loan and avoid loans for spontaneous purchases or things that do not bring value in the long run;
- study the terms of the agreement, including information on the interest rate, payment schedule, fees, late fees, and early repayment options;
- choose a trusted lender, including checking the license of the financial institution through the NBU register;
- do not take out several loans at the same time, as each new loan increases the debt burden and complicates the management of obligations.
How to calculate your solvency correctly
One of the most common mistakes is overestimating your own financial capabilities. Even if, at first glance, the amount of the monthly payment seems affordable, you need to take into account other expenses, including force majeure.
Financial advisors and the NBU recommend following the “30/70” rule: no more than 30% of your monthly income should be spent on repaying all debt obligations. This should leave enough money for housing, food, transportation, medicine, and unforeseen expenses.
Before applying for a loan, you should draw up a personal or family budget and calculate
- total family income (after taxes)
- mandatory monthly expenses;
- the free balance from which the loan will be paid.
If the calculations leave less than 15-20% of the reserve amount, you should not take out a loan, even if the bank approves it. A financial cushion is the basis of stability.
The importance of choosing a loan based on your budget
Not every loan offered is a good deal. Often, a high rate is disguised under attractive terms: “0%”, ‘no overpayments’, ‘free for the first month’. In fact, there may be a lot of hidden fees, interest rate revision conditions, account maintenance or insurance fees.
Before signing the contract, make sure that
- the annual percentage rate (APR) is specified, not just the monthly rate;
- there are no mandatory paid services without which the agreement is impossible;
- there is a clear repayment schedule with the loan principal and interest;
- Whether there is a possibility of early repayment without penalties, as provided by Ukrainian law (Article 11 of the Law of Ukraine “On Consumer Lending”).
The loan should fit into your budget without compromising your quality of life. If you need to cut expenses or increase your income, it is better to take these measures in advance.
What to do if you don’t have enough money to repay the loan
Even with the most cautious approach, crisis situations are not excluded. The main thing is not to hide from the bank and not to hush up the problem. What you can do:
- contact the lender to explain the situation, ask for a debt restructuring or deferred payment (this approach is often practiced)
- apply for a loan repayment holidays – many banks are willing to meet you halfway if you have supporting documents (medical certificates, dismissal, mobilization);
- re-issue the debt, for example, apply for a long-term loan online to repay microloans with a lower rate;
- contact a lawyer (recommended in case of threats, illegal actions of collectors or questionable contract terms).
It is important to remember that Ukraine has a debt regulation procedure in place and prohibits psychological pressure from creditors and collectors (in accordance with the provisions of the Law of Ukraine “On Financial Services and State Regulation of Financial Services Markets”).