How to repay overdue loans in times of high inflation

In February, for the first time in years, the inflation rate in Bulgaria reached double digit – the cost of living is 10% per year. Inflation is projected to continue at a similar pace and even increase in the next few months. This inevitably affects the personal finances of all of us, and when you have overdue debts it is very important to plan your expenses in detail. 

The common cliché is that inflation “eats” debt. People with loans often hope that inflation will “erase” their debt by devaluing it sharply. This rule is only partially true – and only for some borrowers. If you are an individual and even a small company, the chances of benefiting from high inflation are not very high. It is even less likely to help you repay debts quickly and imperceptibly.

On the contrary, the reality is very different. Research shows that in emerging economies such as Bulgaria, high inflation leads to an increase in non-performing loans. The reason is simple – the rise in costs increases expenses, reduces disposable income and so many find it difficult to pay their bills on time. 

If you have already had difficulty and your debt has been acquired by a specialized debt management company, you can save future costs and problems in a few steps:

  • Do not stop repaying, according to what you have already agreed with the debt management company. 

  • In case of difficulties, call immediately and discuss with your creditor how you can get a deferral or reduction of payments. It is important to be prudent and not delay the repayment too much.

  • Whenever you have the opportunity, pay more than your monthly plan.

In this way you will avoid further increase in the cost of the loan. When the debt management company finds that someone has stopped repaying their debt and does not respond to attempts to talk, there is only one way to collect the debt. This is the court meeting. Then the fees, paid for instituting proceedings and for subsequent compulsory collection, are added to the total debt.

One of the advantages of companiesm complying with the Code of Ethics of the Receivables Management Association for is the lack of additional fees. If a bank or other creditor sells them non-performing loans, it does not increase. There is an increase only at the start of court proceedings.

Pay on time and even early repayment of the debt saves future court costs. Early repayment today means having more funds available in the future. And you will need them when inflation lowers their value. There are very few cases where incomes increase at the rate of inflation. Even the administratively defined as the minimum wage and the minimum insurance income do not increase as much. In Bulgaria, inflation makes middle- and low-income people particularly vulnerable. And without much increase, they give a significant part of their income for food and utilities. Inflation means that this share will increase even more in a few months.

And the question – is it profitable to invest this money somewhere and then take it with a high return on interest or stock market profits? In the period of crisis for financial markets such as the current ones, the answer is rather no. The probability of losing is quite real. On the other hand, the repaid loan will free you up money in the future. 

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