A Debt Trap occurs when you start spending more than you make, which causes your debt to grow out of control. For instance, you borrowed money but are unable to pay it back. So you take out another debt to pay off the first one, and you keep doing this. A debt trap turns into a financial maze that can difficult to escape.
Early in life, a debt trap is typically started by borrowing money from friends and family or using credit cards, personal loans, or auto loans. As you strive to pay back the minimum amount of principle and the minimum amount of interest, the debt begins to keep growing each month. We think the next 4 methods might assist you in escaping the debt cycle.
1. Be Aware of and Evaluate Your Financial Status
An examination of your finances, the identification of your problems, and acceptance of your debt are all beneficial. Once you’ve admitted that you’re in debt, pinpoint the areas of your expenditure that are higher and see if you can cut back on any of those costs. Establish and adhere to a spending plan.
2. Identify the Issue
You are probably in debt if you use several credit cards and have reached or are about to reach your credit limit on one or more of them.
Missing EMI payments and accruing charges on bigger sums provide a greater risk. A debt trap develops when you are unable to make regular payments on your obligations and it appears that you won’t be able to do so anytime soon. If your overall debt from all sources surpasses your invested corpus, liquid assets, and all other investments more importantly, if it makes up a sizable amount of your income this is a huge warning signal.
3. Debt Refinancing
Debt consolidation can help you pay off debt more quickly and save you hundreds of dollars in interest. Mortgages, vehicle loans, personal loans, and student loans may all be refinanced. A debt consolidation loan, a personal loan that can have lower interest rates than your current loans, is one option to do this. If you owe money on credit cards, you could also think about shifting the debt to a balance transfer card. For a set period of time, generally between six and 18 months, these cards carry 0% APR.
4. Commit to escaping the Financial Trap
Making a commitment to yourself to work toward escaping the debt trap is where it all truly begins. The first major step is to have the belief and to create a reasonable timetable for escaping the trap.
Speak with those who have already done it or are in a position to afford it. It will assist to just read up on this topic. To escape the debt trap, establish a reasonable time frame. It can take a whole year or longer. The comfort of knowing life is far better on the other side should serve as your motivation.
5. Make a payment schedule and fill in the gaps
Start by maintaining a record of your spending if you’re having problems conserving money. Spend less on luxury products, movies, and other non-essentials like vacations. Try coming up with creative methods to cut down on your daily expenses, including carpooling, taking a cab to work, or eating home-cooked meals rather than takeout.
If you have the time, you may even think about picking up side employment to boost your income. Despite the fact that it may seem difficult, remember that this is simply a temporary situation, and you won’t have to set any restrictions until your finances are in order.
6. Maintain a Minimalist Lifestyle
It makes sense that someone may desire to spend more when their income rises. However, make an effort to keep your spending in check. Modify your initial spending plan a little bit and increase your savings by investing in bonds, stocks, and emergency funds. To be informed about your situation, check your credit score frequently. Take action right now to raise your score if you see a decline.
7. Think about other Sources of Income
Try to have a side job or a rental property as a passive source of income. In order to assist you pay off some of your bills, keep note of any insurance policies you have and whether any of them are due to mature in the near future. To increase your income, you may also think about engaging in freelance enterprises.
8. Manage your Expenses
Improve how you handle your spending by taking a close look at it and working to keep it below your income. For everyone, this is challenging and needs some work. Get a copy of your credit card and bank statements from the last six months, then tally up your spending. You must now begin optimizing your spending, which is the challenging part. You may have to do this to cut back on a few costs that you have on a daily basis but don’t really need. What choices you have will surprise you.
Due to the internet, you may always discover some fantastic solutions that are less expensive if you scale back a little on your lifestyle. Instead of the pricey phone you wish to buy, why not get a less costly (but still functional) model. Changes to your cell plan are a simple yet helpful thing. Extremely wealthy people have a penchant for simply purchasing necessities rather than wants.You frequently find yourself with a companion who coerces you into overspending. Pass on a few invites from those people. There are more affordable ways to enjoy life. If necessary, you might ask family members for assistance or sell certain possessions.
9. Request a longer Loan Term from your Bank
You can ask your bank to extend the duration of your loan if you have a mortgage. Even though your interest rate will go up, this will result in smaller monthly EMI payments and offer you more time to pay off your loans. If you have a history of working with your bank, you should even try to bargain the interest rate. As an alternative, you may think about switching your present loan to a bank with a cheaper interest rate.
10. On your Credit card and EMI bills, pay them promptly
Paying up your bills and EMIs on schedule is critical, but it’s also crucial that you pay them off completely. A debt cycle will eventually result from making partial payments, which will only serve to increase your debt and interest. Making timely payments also enhances your credit score, which will ultimately assist you in achieving financial inclusion and independence.
11. Debt Consolidation
You could discover that you have taken out several loans to cover your various needs. You are now trapped in debt. Consolidating your debts could be a practical answer in this situation because it is a crucial step toward achieving financial independence. Consider consolidating all of your loans into one by taking out just one loan to pay off your current obligations. You’ll have only one interest rate to consider and this one loan will be simpler to handle.
12. Eventually, go from being a borrower to a saver, begin Investing
Activate your investing account. Let your savings begin to work for you rather than you laboring to pay off your debt. Put some cash aside for unexpected expenses. Emergency situations are typically the ones that put you in debt. Cash is one possible form of this. Start putting money down now to achieve important long-term goals. Consider investing in stocks or equity mutual funds for longer-term savings.