People who spend more than they earn are more likely to fall into a debt trap. When they run out of money, they often turn to loans to pay their bills, creating a cycle of debt. Not only you but all generations here should always check their borrowing habits and always stay within the EMI 50% of their monthly income.
Unexpected events, such as a medical emergency or job loss, can quickly put a person in debt, forcing them to take out loans that they may not be able to repay. The most common instances of how job losses can trap one in a debt trap occur at the start of covid-19. To address this, the government offered a moratorium and a one-time debt restructuring solution.
People who do not understand the terms of the loans they are taking out are more likely to fall into debt traps. They may not realise the high cost of borrowing or the long-term consequences of taking out loans. For example, you may have observed many people unnecessarily using credit cards on several luxurious items such as branded clothing, gadgets, or dining out in expensive restaurants. However, when the bill payment deadline arrives, the amount is far greater than what they earn.
Predatory lenders take advantage of people in desperate need of money, offering loans with terms designed to trap the borrower in a cycle of debt. This lending is most common in rural India, where people still rely on money lenders to meet their financial needs.
If a person takes out a loan with payments that are too high for their budget, they may find themselves in debt. Given this, we always recommend using a loan EMI calculator to determine the best loan amount and payback period.
Natural disasters, the death of a breadwinner, or other unforeseen events can result in a sudden change in financial circumstances, leading to a debt trap. To avoid passing the debt burden to loved ones, one should invest in loan insurance and term life insurance.
Getting out of debt can seem overwhelming, but it is possible with a plan and determination. Here are some tried and tested ways to help you get started:
Begin with budget preparation that tracks your income and expenses. It will help you see exactly how much money you have coming in and going out each month. Use this information to figure out the key areas where you can reduce your spending.
Make a list of all your debts, including credit cards, personal loans, and other outstanding bills. Rank them in order of priority, starting with the debt with the highest interest rate. It will help you focus on paying off the debt that costs you the most.
Develop a plan to pay off your debts, starting with the debt with the highest interest rate. Make the minimum monthly payment on liabilities not affecting your creditworthiness, and use any extra money you have to pay down the debt with the highest interest rate.
Consider ways to increase your income, such as taking on a part-time job or freelance work. This extra income can help you pay off your debts more quickly.
It is vital to avoid taking on more debt while you are trying to get out of debt. That means not using your credit cards and avoiding loans or financing deals.
If you are having trouble getting out of debt on your own, consider seeking professional help. This could mean working with a financial advisor or a credit counselling service. They can help you create a plan to get out of debt and provide support.
Also Read: Simple Steps to Effectively Manage a Debt Repayment
In conclusion, the debt trap is a scenario where you find yourself in a cycle of borrowing to repay existing debt, leading to a growing burden of debt and interest charges. It can have severe ramifications for your finances and well-being. However, you can avoid falling into the debt trap by making a budget, paying off debt as soon as possible, and avoiding high-interest loans. You can confidently achieve financial stability and pursue your dreams and aspirations by taking control of your finances and avoiding the debt trap.