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What is Cycle of Debt?

What is Cycle of Debt?

The cycle of debt is a trap in which continued borrowing leads to increasing expenses. Eventually, minimum payments become difficult to manage. Unless the cycle is stopped, most people will eventually default on their loans, resulting in serious financial problems. 

For example, Jane is bringing home $2,800/month from her job. Her monthly expenses, including her mortgage, car payment, insurance, utilities, groceries, entertainment, and other costs total $3,100. She falls behind on her payments because she simply has less money coming in than what is needed to cover what is being spent. Jane takes out a $2,000 loan to catch up. That loan, including interest, costs her an additional $200 in monthly payments, and before long, she again falls behind on her payments. Unless something changes, Jane will continue to find herself in this cycle of debt.

In order to remain financially stable, more money must be coming in than what is spent. (See debt-to-income ratio.) Though it seems simple, the first step in addressing the cycle of debt is to get real about the situation. It’s important to recognize that there is simply too much debt. Start by tracking expenses and creating an attainable spending plan. Consolidating loans, downsizing expenses such as auto or house payments, and saving eating out and entertainment for special occasions are also good strategies.

Financial terms and definitions.

 

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