What is a Debt Trap? 10 Ways to Avoid Falling Into It.

If you’re looking for ways to avoid debt traps, you’ve come to the right place. In this article, we’ll explain what a debt trap is, what causes it, and 10 ways you can avoid falling into it.

In today’s day and age, things have become easier to possess, but they come at a cost. With the ever-increasing standard of living but disproportionate salaries, people are being ushered into the world of debt, and some get trapped there.

So, what is a debt trap? Let’s see.

What is a Debt Trap?

In simple terms, a debt trap is a situation in which your debt gets out of hand.

As people become more and more comfortable taking loans, they’ve become increasingly susceptible to falling prey to debt traps.

There can be many reasons or causes for this, ranging from emergencies to sheer negligence or lack of planning.

Over time, your debt keeps accumulating and the interest on it keeps piling up as well, to the extent that you need to take additional loans to repay the existing debt.

This starts a cycle that is almost impossible to get out of. As this situation progresses, your repayment capacity keeps reducing while debt keeps increasing.

What Causes a Debt Trap?

As mentioned earlier, debt traps can be caused by emergencies, poor investments, or even bad planning. These situations can range from things completely out of control to things that arise out of ignorance.

Let’s look at some of the most common factors below:

1. Loss of income or low income
2. High EMIs on existing loans (more than 50% of your income)
3. Fixed expenses more than 70% of your income
4. Overused credit limit
5. Multiple loans
6. Poor money management
7. Education loans
8. Emergencies
9. Dependency on credit cards
10. Lesser savings than required
11. High cost of living

Now that we know the causes, let’s see how we can avoid these debt traps.

How to Avoid a Debt Trap?

The very first step to solving any issue or tackling any problem is to analyse it. Only if you analyse a situation will you be able to control it and come up with a solution.
In certain cases, you might just find a solution while you assess your situation. Even if it doesn’t, you can create a plan of action to work towards getting out of the debt trap.

This brings us to the second point, which is to budget your expenses and prioritise your needs. If you analyse your budget closely, you’ll see that it has some expenses you do not need.

All of us are guilty of spending money on whims and fancies, and sometimes it gets out of hand, hence the debt trap we find ourselves in.

The trick to finding out your needs is, to be honest with yourself. Understand your needs, wants and fancies, prioritise your needs for a while till you can get out of the debt trap, and stick to those expenses only.

People usually end up taking multiple loans because they need different amounts of money at different times or for different reasons, and fall into debt traps because they don’t realise how big a mountain these little debts create.

The best way to get rid of these debts is to consolidate them into one. We agree, this sounds like you will have one huge loan instead of multiple smaller loans, but the amount does not reduce.

Although, if you consolidate your debt, you only have to pay EMIs on one loan, and one interest rate on the whole credit amount.
Personal loans (like salary loans) are a great way to consolidate your debt and start paying it off with ease. They’re quick loans that you can get conveniently too.

An emergency fund is a must-have for all of us to fall back on in case of emergencies and otherwise as well.

It is ideally a sum of money that can sustain you for 3 to 6 months if you find yourself in a shortage of funds. This can also come in handy to pay off your debt in case you need to.

This option is better than taking another loan to pay off the existing debt.

There are numerous savings options that people use to build their savings, but one size does not fit all. For some, the 50-30-20 rule does the trick; others use the 80-20 rule and can save abundantly.

You should figure out the way that works best for you and stick to it.

Do not keep experimenting with different methods when you figure out one that fits well with your budget.

Credit cards are one of the easiest ways to fall into debt traps because when you have a credit card, it’s easy to spend a lot of money without thinking about it as a loan or credit.

Credit cards offer and encourage this and lure people into the debt trap without them realising it. So, to avoid falling into a debt trap, it’s better to just avoid credit card offers.

Just consider this as an extension of the previous point. Paying off your credit card bill in full each month will help you not fall into a debt trap, because most people don’t realise that it is tougher to pay off the principal amount that they’ve accumulated on their cards.

They end up paying only the interest or minimum payments (small parts of their debt) of the bills. This in turn, adds to the existing debt.

Debt trap occurs when your debt becomes more than your income or your repayment capacity, so it makes sense to borrow only the amount you need in absolute necessity if you want to avoid falling into it.

You should even prepay your loans if you can. This will make things more favourable for you in the long run.

People who fall into debt traps end up damaging their credit score after not being able to repay their credit on time.

The same financial habits that people follow to keep their credit score strong, are the ones you should follow to not fall into a debt trap.

If you’re finding it too difficult to get out of a debt trap, you can seek a professional to help you plan your budget better and manage all your debt in the best way possible.

Some professionals can even help you negotiate with your lender and make your loan terms much more favourable for you.

How can Debt Consolidation be a Better Choice to Come Out of the Debt Trap?

We already talked about debt consolidation earlier, and here we will elaborate on the concept and how you can benefit from it more than any other option mentioned above.

1. Multiple loans might have different interest rates, and all that added up can come up to be extremely high. If you consolidate your loans, you deal with only one interest rate.
2. Managing one EMI payment is much easier than multiple payments month on month.
3. With debt consolidation, you have only one loan tenure to worry about instead of different tenures for separate loans. You can also try and prepay your entire debt through paying back just one loan in such cases, instead of making numerous payments.
4. With debt consolidation loans, you get more control over your debt and can handle it better.
5. It becomes tougher to get new loans when lenders see that you have multiple ongoing loans that you’re still paying back (irrespective of the amount). If you consolidate your loans, your chances of getting a new loan increase substantially.

These reasons make debt consolidation one of the best choices you can make to get out of the debt trap in the most efficient way possible.

Conclusion

By now, we hope you’re clear on what a debt trap is, what reasons can cause it and how you can avoid falling prey to it. We recommend consolidating your debt with an instant personal loan that can make repaying all your debt easy.

In case you need help figuring out how to get a personal loan that can possibly help you get out of a debt trap or any other financial crisis or need, you can reach out to [email protected] or 080-44292200.