How to get out of a cycle of debt

Some people who borrow money find themselves in a `cycle` of debt - borrowing more money to pay off existing debts, then struggling to repay the new debt.

This can be a particularly difficult situation, as it means that the borrower is left with the same level of debt, plus any interest they may incur, until the cycle can be broken.

However, if you`re caught in this cycle, there are things you can do.

What causes a `cycle of debt`?

Let`s assume you are getting towards the end of the month, you`re almost out of cash, and suddenly you are faced with something unexpected - such as car repairs, or dental work. Your only way to pay this might be by borrowing money - typically on a credit card or overdraft.

In this example, we`ll imagine that this has cost you £500. To pay off this debt outright, you would need to earn £500 more, or spend £500 less elsewhere. In most cases, to avoid incurring interest, you would need to pay this off within one month - or you could spread out the cost over the next few months, which will cost you interest on top of the £500 you have borrowed.

But if your existing costs of living and other expenses are leaving you with little room to repay this debt, you may find yourself unable to make up the difference. If you are unable to spend any less - or earn any more - each month, you`ll find yourself stuck with £500 of debt (plus interest) at the end of every month, until you can find the cash to break this `cycle`.

How do I break this cycle?

As mentioned previously, if you can`t afford to pay off the debt in one go, it`s a good idea to set out a plan for how you intend on repaying the debt over the next few months - so, for example, you could decide to repay £50 (plus interest) over the next ten months.

If you think you are going to struggle, it`s worth speaking to your lenders about what can be done. Most lenders will agree to some kind of repayment plan if they can see that it is the most realistic way of getting their money back.

Of course, many people`s situations are far worse than a £500 debt. If you find yourself with significant debt problems and you don`t know how you are going to be able to repay what you owe, it`s time to speak with a professional debt adviser about ways to tackle your debts.

Some of the debt solutions that could help with more serious debts include:

• Debt management plan - an informal arrangement with your lenders in which you`ll make lower monthly payments towards your debts over a longer period of time.
  
  Debt management can be suitable for people who cannot afford their existing debt repayments, but could afford to repay the full debt over a longer time period. Please note that repaying your debts more slowly than you originally agreed will show up on your credit report for six years, potentially making further credit more expensive and/or difficult to obtain in that time.


• IVA - a formal, legally binding agreement in which you`ll repay an agreed percentage of your debts, after which your lenders will write off the rest. This normally involves making monthly payments for five years.
  
  You will only be eligible for an IVA if you cannot afford your monthly payments and you cannot realistically afford to pay off your debts within a reasonable timeframe. You must also live in England, Wales or Northern Ireland to qualify. Please note that entering an IVA will show up on your credit report for six years, making further credit more expensive and/or difficult to obtain in that time.


• Trust Deed - the Scottish equivalent of IVAs, Trust Deeds work in a similar way, but tend to last three years instead of five. As with an IVA, entering a Trust Deed will show up on your credit report for six years, making further credit more expensive and/or difficult to obtain in that time.

Remember that all of these debt solutions have their advantages and disadvantages, and whether they are right for you will depend on your own circumstances. Always speak with a debt adviser before making any firm decisions.

For more information on debt solutions that could help you, click here or call 0800 195 2911 today.

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