Evaluating Debts… and why not to get into them!
When people consider whether or not to go into debt be it for a purchase, a service or an investment they almost always miss-judge the full costs of debts.
Debts are made up of several different costs:
1) The face value cost i.e. a loan for $20,000 with monthly repayments of $500
2) The hidden costs
a) Ability to repay debts when other un-planned situations arise
b) Personal time
c) Emotional toll
Lets look into the 3 hidden costs a little more.
Dealing with un-planned situations.
When we are repaying debts, changing situations inevitably arise. We have a new job and need to purchase a car to travel. We move houses. A new type of movie player (ala HD-DVD) is released and we *have* to buy one. The share market drops and we want to take advantage of the low share prices and buy in.
All the above will require financing. Financing must come from 1 of to 2 places. Either we borrow money or we divert existing funds away from other payments.
Either of the above will place increasing pressures on any existing debts that we have.
The longer the debt the higher the risk is for the above to occur.
So the end result is? It takes longer to pay off the debt or we need to re finance the debt. Both of which create issues with regards to Personal time and consequently have an Emotional toll.
Some would argue that as our wage increases over time it is easier to pay off the debts. I strongly disagree as over time not only does our wage increase but so does total interest, amount of debts and of course the price of goods (inflation).
Personal time.
So what happens when we have to re-finance debt or extend the payment terms?
Inevitably one will have to phone not just one but many financial institutions multiple times.
Why?
To find out what is the most efficient way to re-finance the debt.
To hear the precise terms of the re-finance.
To accept the offer.
If you consider that financial institutions like to make customers wait on hold for around 20 minutes and have those dreadful computer answering voices (press 1 for blah, press 2 for blah e.t.c.). The personal time invested in the debts and the emotional toll increases dramatically.
To make matters worse lets add to the mix a house move. Now one will have to phone all related financial institutions to notify them of the new address. If it takes 30 minutes to call each one and you have multiple institutions financing your debt you could be in for a very long haul!
… and what happens if your working 9 till 6 with a 1 hour lunch break? Calling such institutions could take weeks of free time!
Emotional toll
So you’ve spent all lunch time for a month on the phone to financial institutions listening to “You have progressed in the queue” messages. Un-planned for costs have dramatically increased the length of time you will need to close off the debts and the size of the debts and the total interest has increased.
What happens?
Stress.
You lye awake at night. You get angry at your partner, friends and family.
What’s worse is that as new debts come in and old ones are extended due to re-financing the situation will get worse and worse spiraling out of control.
The moral of the story.
Research and way up the debts you are entering. Their will always be hidden costs. Make sure you plan for them!
Can you really afford that debt?
