Interest rates on unsecured loans and credit card ouststanding amounts are high and if the amount remains unpaid for long, the interest to be paid often exceeds the principal or actual amount borrowed.
The outstanding debt has several adverse effects. The lifestyle of the borrower is affected and he lives in constant fear of the debt collection agencies, who contact him over phone or send their personel to his house to collect the outstanding amount. The lender may threaten to take legal action.
If a borrower defaults on payments or the payments are delayed, the credit rating of the borrower are also affected. This makes it difficult to take any loans in future and if he manages to get a loan, the interest rates are significantly higher than what a person with excellent credit will have to pay. This only worsens the financial condition of the borrower and an even larger part of his incomes goes towards repayment of the debt.
Some employee use the credit record and credit score of an individual to be indicator of how responsible he or she is. This is an important criteria, especially when the job involves handling confidential information. So if a person has a lot of debt, the chances that he will get well paying jobs is reduced to a great extent.