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How to Make your way Out of a Debt Trap

A debt trap is basically a financial situation when an individual is unable to pay EMI or credit card payments by the due date, which results in an ever-growing bills or payments of outstanding debts. Also, the individual will be considered debt-ridden in case he or she does not have any funds left for further savings or any other investment purposes. He or she can be caught in a web of debt if they have taken too many loans and hence are unable to make the payments on time or the worst being the using of one form of debt to pay off another. For instance, taking a personal loan to pay off your credit card bills.

How to Escape From the Debt Trap

So, how to you get yourself out of such a situation, or better, avoid such a situation? Read on to know how to escape from a deathly debt trap:

1.     The first step is to analyses the extent of the individual’s debt. List down all their debts, as well as with their interest rates along with outstanding loan amount. This will help to understand which loans are actually draining the individual’s finances the most. Then, the necessary expenses can be listed which may include day-to-day household expenses as well as insurance premiums, finally calculating the total amount available for the loan repayment. 

2.     A lot of people do not ask for soft loans from friends or family members. This should be ideally the first people an individual should reach out to. But it is important to repay back the loan amount at a promised date, even it is 2 years later. Such borrowings come have no interest or very low interest cost and therefore, easier in paying off other debts. 

3.     Unsecured loans such as credit card dues or personal loan always have high interest rates which can go up to 45% and 25% respectively. However, a home loan or even an education loan has tax deduction benefits, thereby reducing the cost of borrowing. Your strategy should consist of getting rid of your expensive loans first while continuing with the beneficial ones. However, the individual must continue to make the minimum payment for all the loans and debts, otherwise he or she will be penalized, further aggravating their debt position. 

4.     It’s best to pay off the high interest-rate loans by availing new loans at low interest rates. For instance, if the individual has credit card dues carrying an interest rate of 40%–45%, paying it off by availing a personal loan is a great idea. This way, the individual will be able to save him or herself from high interest outgo. One can also go for some other cheaper options such as loan against securities, gold, fixed deposits as well as insurance policies. 

5.     It’s best to use your low-yield investments to pay your loans bearing higher interest rates. If there is a fixed deposit yielding 9% returns per annum and a personal loan at 18%, it is a better idea to liquidate it in cash to pay off the loan.

6.   Sometimes approaching the lender for restructuring the loan by extending the tenure also helps. Though this will help bring down the EMI, the net interest pay-out will increase. If this is not a possibility for an individual and one does not have any other option left, perhaps you can look at settling the loan with the lender. However, it advisable not to go for it as settling a loan greatly impacts an individual’s credit score and hence would make it difficult for the individuals to get approval for any future loans.

Finally it’s up to the individual to be able to find their way through the chaos by making calculative decisions that are up to helping you out instead of making it worse for you.