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Congratulations to Jessica Cherubin – our first PDAD Scholarship winner. We were impressed by her essay about The Hidden Dangers of Long-Term Debt for what Jessica Cherubin got awarded with a $500 scholarship by PayDayAllDay. We are pleased to publish Jessica’s essay with a hope you as our reader will enjoy it too.

The Hidden Dangers of Long-Term Debt

Every consumer at some point becomes familiar with long-term debt and its consequences. Though, with limited financial knowledge and minimal financial resources, the hidden dangers of long-term debt may not be something that consumers are aware of or prepared for. The consequences of long-term debt become very clear when paying off high-interest rate student loans, outstanding credit card bills, car payments, and/or after purchasing a home.

Although these different forms of debt can be paid off, it is a question of how long, on what terms, and by what means. By failing to understand the conditions of debt, many consumers fall into “debt traps” since they do not reflect enough on the importance of their debt-to-income-ratio, the importance of establishing financial security, and the possibility of foregoing a pleasant life.

When analyzing the concept of long-term debt, it is just that—money that is owed and will be owed for a long period of time. Accepting the terms of debt by paying in installments is simple, though calculating the life of the debt and the total amount of interest that will be accrued, is not. Failing to consider one’s debt-to-income-ratio, which is the total amount of income measured against the total amount of debt that one can afford, can result in many consumers falling victim to additional fees and charges they are unable to afford.

With late fees, increased monthly payment plans, and increased interest rates, many consumers are left to pay a bill with money they do not have. For example, in the case of credit cards, very few consumers understand that exceeding the cards maximum utilization percentage of 30% along with APR rates, can result in the consumer owning more money rather than less if they spend more than they can afford. Yes, the credit cards help build credit, but at the same time not understanding the terms of the credit card can also damage credit.

Being unprepared to pay off more money, consumers are now forced to find new ways to pay off expenses out of their financial means. According to an April 13, 2018 article posted by Time Money, “During peak earning years, the average American can have up to $50,000 in debt”.

Hence, if one earns $50,000 a year, and has household expenses, auto expenses, medical expenses, and dependent expenses; then how much can be paid off on their loan without reducing what is needed for all the other expenses? Basically, tight budgets become even tighter as the primary focus of the consumer shifts to incorporate different mechanisms that can be used to pay off their debt. This preference for choosing to pay off debt sooner rather than later has a lot to do with the fear of being delinquent and going to collections, being foreclosed on, and/or having an item repossessed.

This pushes the consumer to live for the debt rather than live with the debt. As a result, many consumers are deprived of not only money but a life. Some consumers put off the importance of establishing essential assets such as emergency savings, health care, life insurance, buying a home, and saving up for their retirement because they cut back on the necessary things in order to financially accommodate being able to pay off whatever monies they owe.

Once a consumer signs a binding financial agreement, they are obligated to make the necessary payments until all their debt has been paid off. Though when struggling to keep up with the financial obligations of long-term debt, a great number of consumers end up falling within the federal poverty guidelines. Although it is not the desired result, for those consumers who can no longer keep up with the required payments, there is no other option.

Hence, the consumer becomes a “financial slave” as the exhaustion of long-term debt impedes their ability to repay their loans at a faster pace. As opposed to terminating the consumers’ financial woes, the financial struggles the consumer has to face will be more difficult to overcome. In some cases, this may mean that the consumer might have to live like a miser as they are unable to enjoy some of the pleasantries of life such as going out to eat, going out to the movies, or even taking a trip to go out of town. Hence, not only does long-term debt wear the consumer out, but it also strips them of their inner peace.

Once consumers become familiar with long-term debt, not many like to deal with it. When handled improperly, long-term debt can be somewhat of a curse. Unless all or most of the debt is paid off, long-term debt can ruin a consumer for their entire life because long-term debt affects a consumer’s debt to-income-ratio, financial security, and peace.