Over-indebtedness is a financial situation that does not favor borrowers, but it makes the financial lending institutions a lot of money. Having too much debt is one of the main factors that drive people towards poverty, especially when combined with old age, low income, and single debtors.
If you review other studies, many authors argue that debt can be leveraged and is beneficial to society. However, over-indebtedness is a dangerous slope many slide down.
On the other hand, major financial institutions around the globe are also not immune to failing to control their debt. If we look back to 2008, banks were facing bankruptcy just like regular people due to over-indebtedness.
This practice of banks taking on more debt than they can handle is most common in developing countries. Consequently, most of the population lives below the poverty line and cannot repay the loans. However, government bodies and giant financial institutions provoke to support the damaged institutions via mortgage solutions.
The over-indebtedness trajectory is a debatable topic. COVID-19 has hit every business sector very hard, and financial sectors in many countries are implementing new strategies to cover losses. However, the International Monetary Fund (IMF) has recently announced new policies for the prosperous future of micro-financial institutions and banking sectors.
To avoid another 2008 recession, some banking sectors in developing have implemented mortgage strategies to cover debtors’ loss.
Can Disability Be Both A Cause And A Consequence Of Poverty?
Among the other causes that contribute to poverty, disability is one of the major factors of poor individuals. In underdeveloped countries, if a person is poor, they will struggle to attain good health, education, and other benefits.
Scholars of empirical studies have analyzed this relationship and found that debt and poverty contribute to each other. Disability is interrelated to poverty. Although if you study the literature based on disabled poverty, you will find three hypnotized defined models.
Source: Figure 1: Poverty & Disability
Model #1 – The Individual’s Problem
The first model debates the disability and considers it an individual’s problem. If a person is disabled, he or she will not perform social duties properly. Social welfare is responsible for providing life necessities, such as food, clothes, and others.
Model #2 – Government Assistance
The second model represents flexible solutions for disabled people in society. This model develops an understanding of disability and full support awareness in society. This allows people to be given equal opportunity chances for services and positions in the labor market provided by social welfare or government.
Model #3 – World Health Organization
The World Health Organization (WHO) established the third model, and the purpose of this model was to understand the variation between social, disability functionality, and health issues. To apply this model, the barriers of disability and health is by social class.
By examination and proper data analysis of the given model, researchers find variation between poverty and disability.
The Causes Of Over-Indebtedness
Over-indebtedness is an undesirable state for both microfinance institutions and borrowers. Below are the causes that will highlight a few reasons for over-indebtedness.
1. Shift In Circumstance
Since there is no proper mechanism introduced that measures the shift of change in circumstances, the credit industry struggles to deal with it. However, if you review previous studies on the topic, the shift in circumstances varies around unmanageable debt.
If consumers already have a high level of accumulated debt, they might face low savings, and their debt to income ratio will rise. This condition will automatically push the consumer towards over-indebtedness.
Some other factors can be the possible reasons for over-indebtedness due to shift in circumstances. Such as survival and lifestyle borrowers, these indexes are fulfilled by day to day expenses.
2. Change In The Employment Eligibility
People with personal over-indebtedness scenarios face serious difficulties in the labor market. Their skills and eligibility can become a challenge for them. As you might have learned from the media, there is an employee recession all over the world. COVID-19 is one of the significant factors of the unemployment ratio along with other environmental and societal factors.
Employees who have the skills and facilities to work from home are better prepared to survive this recession. But again, skilled market labor will face the consequences, which will continue to divert as a consequence of unemployment and over-indebtedness.
On a similar note, some organizations and firms have changed hiring and eligibility for employment in developing countries. This is because not all employees know about computers and advanced technologies.
3. Losing Benefit Entitlements
Once you resign from a job, you might be worried about replacing the benefits you previously enjoyed. Benefits depend upon how you quit or lost the job. Different organizations have their own policies varying upon the nature of the HR practices. Likewise, if you were working in an organization for more than two years, then you might be able to claim the entitled benefits.
Often a change in jobs can result in a gap of time before new benefits are acquired. Due to the delay, individuals who have already borrowed money from different financial institutions may not be able to repay the monthly minimum, which results in late fees.
This practice goes on, and it can quickly become a scenario of over-indebtedness.
4. Living On A Low Income
Living on a low income is another reason for over-indebtedness. If your budget is tight, it can be difficult to keep your monthly spending on track. Each penny needs to be accounted for and most people go over budget on food and grocery items.
Because a tight budget is a common reason people unintentionally overspend, some people resort to borrowing money via personal loans or other high-interest options like payday or title loans.
Keeping in mind that on a low income, it is difficult to repay loans. To manage other loans, some individuals take out more loans or fail to repay existing debts.
5. Relationship Breakdown
One positive influence on reducing debt in households is the increased presence of women in the workforce. The stay at home mom and wife role is no longer considered mandatory, and the workplace has started to openly welcome women to higher-paying employment opportunities.
The job efficiency was at its higher position at that time. However, this span did not hold for long, and since the 1990s, household debt has increased rapidly. Global economic recession and interpersonal conflicts became the reasons for household debts.
Once the relationship breaks and wives and husbands divorce, debt repayment can become a problem for both. As suggested by a study of coursework help UK, one single partner may not be able to repay the complete installments accompanying other expenses. These relationship breakdowns are another reason for over-indebtedness.
6. Adaptability Towards Life Change
Adaptability is interpreted as both the process and the outcomes. Globally, “change” is handled very carefully for its uniqueness and dependency on the human side. To facilitate your life’s desired positive outcomes, you might need more money to spend – standards of living change according to society’s norms and lifestyle.
If someone is at the adapting stage, social differences, ethnic differences, and a desire for a luxurious lifestyle, usually requires more money than people have. This adaptability towards change pushes them to take on more debt to keep up with an unsustainable lifestyle. This is because he or she might not be able to repay the amount of debt they take on.
7. Decreased Financial Capability
Financial capability is also one key attribute of over-indebtedness and is also referred to as financial literacy. Wealth inequality distribution, different modes of returned installments, fixed interest, and floating literacy is essential for consumers.
Studies in various financial sectors proved that many who have financial loans have minimal knowledge about the payback period and over-indebtedness. To avoid a debt spiral, debtors must have knowledge about financial loans, how to invest borrowed money, and how much time they will have to return the amount and settle the interest rate.
Decreased capability is also assumed as the self-controlled intention of a consumer. Sometimes consumers deliberately delay repaying the loan amount. This drags the partial amount higher to be paid and the time period lesser.
Currently, the micro-financial sector is suffering seriously because of over-indebtedness. This is not only the problem of developing countries but of developed nations as well. According to a study conducted by Rajagiri Business School, 39% of respondents were facing over-indebtedness.
According to the United Nations (UN) stats worldwide, 11% of the population is living below the poverty line. In such a scenario, it’s understandable why consumers struggle to repair their debts. Interest is also another contributor to indebtedness that quickly compounds out of control.
Concluding remarks can be given as, “yes,” there is some contribution of disability, poverty, and existing debts that cause and maintain over-indebtedness. However, financial experts are finding new strategies to help people avoid debt and start building wealth on any income.