Anna’s divorce left her not only healing the wounds of lost love but also dealing with significant debt.
So much was her emotional pain that she walked straight into the legal proceedings of getting a divorce as quickly as possible without negotiating assets and liabilities of the joint wealth.
In fact, during the marriage, she left all the financial management – including her income – to her husband to manage. In addition, she signed on to debt blindly as it was all about their shared home at retirement.
Standing on her own meant she had to confront dealing with expensive debt. High interest, high monthly instalment, high service charges. All whilst she had to get her son through private school and university and maintain an edge in her highly competitive job.
Her learning curve was fast. She looked at her personal assets, valued their worth, and compared it to the value of the debt at maturity. Debt was costly, and the interest rate was variable (debt interest always suits the bank’s profitability). She had to understand how debt works – within the terms of contract she blindly signed– in order to find a negotiating position. It took her 4 years to achieve closure and safeguard some of her assets, and once it was done, she promised herself “no more debt”.
Debt affects nearly every woman at some point in her life. Whether it’s a student loan, credit card, car loan, or mortgage, or being a guarantor to someone else’s debt, borrowing money is sometimes necessary. But understanding how debt works, especially interest rates, can help you make smarter choices and avoid money traps.
What is debt?
Debt simply means borrowing money to spend or invest (preferably in risk averse assets) – which you agree to pay back over time, usually with extra charges and interest. Debt is usually guaranteed by either an asset or a personal promise of repayment. The lender always wins.
The borrower wins only if it is repaid fast, it does not exceed 15% of income and interest is negotiated. Interest is how lenders (like banks) make money from lending you money. The longer you take to pay back the loan, the more interest you end up paying and the more profitable for the bank. Think of interest as the cost of borrowing. If you borrow €100 and the interest is 10%, you’ll owe €110. But it’s not always that simple, because not all interest rates work the same way.
There are two types of interest rates: fixed and adjustable. And interest is compounding. It means it builds up every month, adding to the amount it is owed. So watch out for that term “compounding”. Understand it and manage it.
Smart questions to ask before taking on debt
Before saying “yes” to any loan or credit offer, consider:
- Is the interest rate fixed or adjustable?
- What is the total cost of the loan, including interest and fees and any management charges?
- Is there interest on interest (compounding of interest on my monthly balance?)
- What is the monthly payment?
- Can I afford it long-term?
- Are there any penalties for paying off early?
- What happens if I miss a payment?
Debt isn't always bad, but it’s important to borrow with your eyes wide open. Knowing how interest rates work gives you more control over your money. Don’t be afraid to ask questions. You deserve to understand the terms before you sign off on any commitment. Best practice tells us that debt should not exceed 15% of our income or 20% of the value of our assets.
If Anna had done her homework and taken charge of her financial knowledge her financial independence would have given her a different trajectory.
Remember, knowledge is power, and financial knowledge is freedom.