A loan might be quite beneficial, but it can also put you in serious financial difficulty. Simply described, a debt trap occurs when debt becomes nearly hard to repay due to high-interest rates, limited financial means, and several loans with multiple EMI payments. Debt, on the other hand, can be properly handled if you fully comprehend its complexity.
Let us look at some ways through which we can try to get out of a debt trap.
Recognising the issue
You are probably in debt if you have several credit cards and have exceeded or are going to exceed your credit limit on one or more of them.
Missing EMI payments and incurring charges on higher volumes pose a greater threat. It becomes a debt trap when you are unable to return your bills on a regular basis, and it appears that you will not be able to do so soon.
If your entire debt from multiple sources surpasses your invested corpus, liquid assets, and all other investments, and, more importantly, represents a large amount of your salary, it's a major red flag.
Prioritise debt
You could be in debt for a short or extended period of time. Short-term debt includes things like credit cards and personal loans, while long-term debt includes things like mortgages. After you've separated your debt by tenure, start addressing the loans with the highest interest rates, overhead costs, and fees.
Home loans, for example, have a lower interest rate than short-term loans. Annual interest rates on credit card loans, on the other hand, can be as high as 35-40%. Failure to pay credit card bills on time results in a monthly interest penalty, as well as a host of extra costs, which can lead to overuse.
Fill the gaps and make a payment plan
Start by keeping track of your costs if you're having problems conserving money. Reduce your non-essential expenditure on things like vacations, movies, and luxury purchases. Try to think of new ways to save money on a daily basis, such as carpooling, taking a taxi to work, or eating home-cooked meals rather than buying takeout.
You may even consider taking on side jobs to supplement your income if you have the time. Although this may appear to be a challenge, bear in mind that it is only temporary, and you will not be restricted until your finances have stabilised.
Have ample insurance coverage
To protect yourself and your family from catastrophic events, purchase the necessary insurance. Your rates will be less expensive if you buy insurance sooner rather than later. Having insurance helps you to focus all of your resources on paying off your debts rather than worrying about escalating medical bills.
Ask your bank to extend your loan term
You can ask your bank to extend the term of your home loan if you have one. While your interest rate will go up, your monthly EMI payments will go down, giving you more time to pay off your loans.
If you have a long-standing relationship with your bank, you should attempt negotiating the interest rate with them. Consider switching your current loan to a bank that offers a lower interest rate.
Raise your payments and EMIs contribution
To pay off your loans faster, you might increase your EMI contribution proportionally to your increase in wage.
These are some of the many ways that might help you to get out of a debt trap. Remember it is critical that you believe that there is a way out of any debt predicament. While it may take some time, it is crucial that you make a plan and follow it, in order to be able to pay off all of your debts.