Debt can spiral out of control quickly. Some people are perpetually in debt.
But others who have always been able to pay can be thrust into spiralling debt thanks to unforeseen life changes, says Susan Taylor, chief executive officer of Financial Services Complaints Limited.
The curse of compound interest
It starts with missed debt repayments leading to compounding interest. For example, if you borrow $2000 at 19.95 per cent and are not paying it back, you owe $2033.25 after the first month.
You pay interest on that compounded interest the next month.
The interest on interest compounds and by the end of the year you owe $2478.11. After more than three-and-a-half years the original debt has doubled.
Fees, fees and default interest
Of course you're never going to get away without paying interest.
If you start to miss a few payments, you'll also be hit with default interest and fees.
At the bank that might be $10 a month or even $25 to $30 for each default.
A regular second-tier lender such as Geneva Finance will charge a number of fees.
Geneva's charges for text message and phone-call reminders range from $2 to $5, letter fees from $7.50 to $40, plus there are recovery costs, and the default interest.
If a direct debit has failed from your bank account to your finance company you'll be charged by your bank for that as well.
It's charges such as these that turn a small outstanding amount into a debt time bomb.
Good lenders that follow the Responsible Lending Code will typically check an individual's credit report before lending, says Keith McLaughlin, managing director of credit reporting agency Centrix.
The lender can see from that report if you're paying back existing loans, have paid back previous loans, or that you've missed occasional or regular payments.
Before offering you more debt, a responsible lender should sit you down for a discussion, says McLaughlin.
But this doesn't always happen. Even since the Responsible Lending Code came into force in 2015 Financial Services Complaints Limited has seen cases where lenders have not made fresh checks each time they lend more money to the same person.
When Taylor sees cases where the debt has spiralled out of control it is often because there has been a dramatic life event such as redundancy, bereavement, illness/disability, a relationship breakdown or a co-borrower has skedaddled.
More often than not the debtor felt that he or she could handle the repayments on the loan when it was taken out, but didn't plan for the unexpected.
"If you are really struggling to meet the repayments you should be asking your lender to put you through a hardship process," says Taylor.
If the lender refuses to restructure the loan and accept reasonable repayments the borrower can take the case to the relevant dispute-resolution service.
FSCL is considering a complaint where the borrower repaid her first loan for a car with no problems.
For a second loan she topped it up to pay for unexpected car repairs.
She then started to borrow to help her children and became co-borrower in one case.
"Then the children stopped paying and ran off overseas, leaving her with the debt," says Taylor.
Once her children defaulted she was hit with the ongoing default interest charges and administration fees. What was a $4000 loan spiralled to $20,000.
First, second and third-tier lenders
The better the lender the lower your interest rate.
A credit union, for example will usually charge less than a bank, which charges less than a second-tier lender such as a good finance company, and that is cheaper than lenders of last resort in the third tier.
This is all the more reason to keep your credit score clean and make payments on time, says McLaughlin, so that you can access credit from better-quality lenders.
"You should be dealing with the most reputable organisations you can," he says.
In the past, lenders could only see the number of credit applications you had made and if there were any defaults.
Now they can see month in, month out how good you are at repaying, which enables them to make more informed choices when lending.
When debt gets out of control the borrower often knows, but doesn't admit it to themselves.
Some signs include only being able to make the minimum payments, missing payments, using one type of debt to pay another or cash advances when you run out of money, your credit score is dropping, or you're being denied new credit.
Only by being honest with yourself can you start to dig yourself out of the mire.
Ultimately, doing without the credit whenever possible is the least costly way to operate your personal finances.
Being perpetually in debt is costly even if you make payments on time and in full. You're still paying the interest percentage more than others for the same purchases.