GETTING out of debt is about more than finding enough money to make the next payment.

For borrowers juggling credit cards, personal loans and other obligations, getting out may mean restructuring existing debt, consolidating balances or changing the order in which debts are repaid. But choosing the wrong solution could leave borrowers paying more or right back where they started.

“Once you are serious about your financial health, you have to know your numbers, and the numbers include the interest rate, the terms, et cetera, meaning how long you are paying this,” financial adviser Stacey Ann Jarrett of Marathon Insurance Brokers said in an interview with the Jamaica Observer.

For borrowers who are struggling to keep up with an existing loan, debt restructuring may be an option before the situation deteriorates further. Debt restructuring involves working with the lender to change the terms of an existing debt to make repayment more manageable. Depending on the lender and the borrower’s circumstances, this could involve changes to the repayment period, payment schedule or other terms of the existing loan. Extending a loan, for example, may lower the monthly payment but could also mean remaining in debt longer and paying more interest over time. Borrowers considering this option should therefore find out what their new monthly payment would be, how long the revised loan would run and how much they would ultimately repay under the new arrangement.

“You want to ask them, how much will you pay in total when the loan is finished? And they can give you that because they have those things at their fingertips that they can give you. So insist on getting that kind of information,” she stressed.

JARRETT… sometimes, what I find in my experience is that people get into debt to fix a problem, then get into more debt to fix the first problem that the debt didn’t fix, and then it just continues on and on

Debt consolidation, on the other hand, takes a different approach. Rather than changing the terms of an existing debt, it generally involves taking out a new loan to pay off multiple existing debts, leaving the borrower with one loan and one payment to manage.

“The biggest misconception is that debt consolidation eliminates debt. It doesn’t,” said Michele Cain, head office branch manager at AIM Financial.

The existing debts may be settled, but the borrower still has a new loan to repay. Customers seeking debt consolidation from AIM Financial provide statements showing the balances they want to consolidate, with approved funds paid directly to the institutions being settled. Cain said the consolidation therefore does not necessarily mark the end of the debt cycle. Before consolidating, Jarrett says borrowers should determine whether the problem can be addressed without taking on another loan.

“I, of course, recommend looking at your personal finances first. You want to look at what you can cut from your expenditures before you look at taking on a debt consolidation loan. Because it could simply mean that restructuring your finances as it is, could solve the problem that you have. If it cannot, you would need to look at something else,” Jarrett said.

While consolidation is an option, approval is not automatic. AIM Financial said its approval process includes an assessment of whether the proposed repayment is realistically affordable. It looks at the customer’s overall financial position, including income, existing monthly obligations, employment stability, repayment history, creditworthiness, the purpose and amount of the debt being consolidated and whether the proposed repayment is realistically affordable. A consolidation loan may not be appropriate where a customer’s income is insufficient to comfortably support the proposed repayment, the existing debt burden is already too high, or the new borrowing would simply allow the customer to take on more debt without addressing the underlying financial problem.

Meanwhile, for borrowers who can continue meeting their minimum payments while putting additional money towards their debt, two common strategies are the debt avalanche and debt snowball. The avalanche method prioritises the debt with the highest interest rate. This approach can reduce the amount of interest paid because the most expensive debt is attacked first. The snowball method, on the other hand, starts with the smallest balance. Once that debt is cleared, the payment is redirected towards the next smallest balance. The avalanche method can result in less interest being paid, while the psychological benefit of seeing smaller debts disappear can make the snowball approach easier for some people to maintain.

“So the avalanche method makes sense when it comes on to the max of it, but the snowball method makes sense when it comes on to your mindset,” Jarrett told the Business Observer.

Borrowers looking to get out of debt may consider restructuring, consolidation or repayment strategies such as the avalanche and snowball methods, but addressing the underlying financial pressures is key to staying out of debt.Photo: Adobe stock

But paying off a balance does not necessarily solve the problem that created the debt. Some borrowers repeatedly take on new debt to address problems left unresolved by previous borrowing.

“Sometimes, what I find in my experience is that people get into debt to fix a problem, then get into more debt to fix the first problem that the debt didn’t fix, and then it just continues on and on,” she said.

That is why Jarrett encourages borrowers to look beyond the balance and examine what is driving the borrowing in the first place. For some borrowers, debt is a symptom of a wider cash-flow problem. If monthly expenses consistently exceed income, paying off the existing debt without changing that equation can leave the borrower vulnerable to borrowing again.

“If the debt is created by a monthly cash flow deficit, meaning you’re spending more than you’re earning, then fixing that debt will not solve the problem. So it takes a deeper dive,” she added.

That deeper dive can involve identifying spending triggers, reducing expenses, increasing income and examining the financial pressures that lead to borrowing. Once the debt is under control, the next challenge is preventing an unexpected expense from pushing the borrower back into debt. Jarrett recommends building an emergency fund, or what she calls “get vex money”, to create a financial buffer when something goes wrong.

“When you fix yourself, you fix your finances because your finances are intimately connected with your sense of self and who you are in general,” Jarrett said.