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What Can You Do If You Are Stuck In a Debt Trap?

What Can You Do If You Are Stuck In a Debt Trap?

  • By Saral Credit
  • May 17, 2022

Numerous circumstances take people into the debt trap. A most common reason behind falling into a debt trap is pushing your dues to the coming months. There isn't a big problem if you continue skipping your credit card bills or regular EMIs. But, it will become a big heck once you plan to repay it after a few months as the repayment amount will increase drastically.

The easy and quick availability of credit cards and personal loans during the pandemic has made it challenging for some people to manage their expenses and quickly get into a debt trap. Ultimately, this has caused huge debt troubles for numerous people across the globe.

Additionally, the festival season is another big reason people make heavy purchases without bothering their income potential. Followed by heavy sales, they cut the total spending into monthly instalments, which creates a big hurdle for the coming months.

If you are into a debt trap, this doesn't mean your game is over. Instead, there are numerous ways to come out of this trap and end your debts smartly.

Identify the Red Flags:

Before proceeding to any debt handling step, it's essential to know that not all credits/loans are bad. You must know the big problems in your monthly expenses that need immediate attention. Hence, tracking the primary issues is a must when you are planning to come out of the debt trap. Below are the issues that you must attend to immediately:

  • Hiked Credit Card Bills: Check whether you have skipped a few credit card bills and only pay the minimum due amount. If you are doing so, it's apparent that you are getting into a debt trap.
  • Increasing EMI Amounts: Regardless of the reason, if you have pending EMIs added with late payment fees, you are into a debt trap that needs your immediate attention. Quitting the debt is essential to save the penalties and maintain a good credit score.
  • Paying a High Portion of Salary as Debt: Check how you spend your monthly income. If you find that your heavy portion of the salary goes into debt, it's a serious concern that you must attend with no delay. This seems easy for now but can create a big problem in the future.

If you find yourself in one of the above-given situations, it's a good sign that you are into a debt trap and need a concrete remedy to this problem with immediate effect.

Prioritize Your Debts:

Now you have a positive sign of being into a debt trap; it's time to find options to clear them quickly and move out of the debt. The best way to start is to sort your debts into short-term and long-term debts. E.g., repaying your credit card bills is a short-term debt that you must clear immediately.

Remember, short-term debts are often penalized with higher interest than long-term ones. However, if you find any other debt that is costing you a higher interest rate, it's better to make a repayment plan for such debt.

Long-term debts like home loans have a low-interest rate compared to credit cards, personal loans, etc. Hence you can prioritize them after repaying your urgent and short-term debts. If you continue missing out on these bills, you are adding piles of interest that will get tougher with time.

Create a Pre-payment Plan:

Struggling to start repaying your debts? The first step is eliminating your unnecessary expenses that put an extra burden on your monthly income. Common unnecessary expenses include leisure trips, festival purchases, frequent hotel/restaurant visits, etc. Think about your debts before putting your savings/income into these expenses.

If time allows, you can take advantage of part-time jobs that can help you earn extra income above your monthly salary. Undoubtedly, it's common to struggle when you are under heavy debt, but this isn't a permanent struggle. Once your debts are over, you can take a break from your part-time work and enjoy a debt-free life. 

Most people use Excel as the traditional budgeting tool, but if you don't have time to manage it, go with various online budgeting apps.

Experts recommend starting a kitty or RD (Recurring Deposit) to start saving small and get a lump sum within 6-12 months. This will help you pay a significant amount and clear some of your short-term debts.

Protect Your Family with Insurance:

Health insurance is a must to avoid unforeseen circumstances. It's highly recommended to cover yourself and your family with health insurance. The right-hand rule mentions that the health insurance cover must be equal to the heart transplant cost in your city. The standard plan for a couple starts with 5 lakh, which covers most health issues and protects you from heavy expenses during any unforeseen circumstances.

If you are the only earning member of your family, don't forget to add term insurance to your catalogue. Term insurance ensures a high payoff in case of your unexpected demise. In case of your death, your family gets a significant amount that can be used to clear the debt and plan a secure life.

Extend Your Loan Tenure:

You can also request your bank to extend the loan tenure and decrease your monthly EMI. Obviously, increasing the loan tenure will extend the interest amount, but it will give you enough time to clear other debts and focus dedicatedly on your long-term debts.

If you have a loan with a floating interest rate, you should take advantage of decreasing interest rates and reduce your repayment amount following the same repayment tenure. 

If this doesn't work, you can also find other banks offering low-interest rates or high repayment tenure with lower EMI. You can transfer your loan and start clearing short-term debts.

Increase Your EMI Contributions:

If you want to clear your debt quickly and move out of the debt trap, the simplest way is to increase your EMI amount. This will decrease its tenure and clear the loan within a short tenure. Some loans allow you to pay a lump sum once or twice a year, which you can use to lower the principal amount and decrease its repayment tenure. 

Every year, you get an appraisal that is also a good opportunity to increase your EMI contribution and clear it in a short period. 

Stop Being Prey to Exciting Bank Offers:

You often get calls from various banks offering you the option to cover your full credit card payment into EMI with various other benefits. This looks soothing to some extent but adds a burden for the coming months for no reason. 

Banks call you to reach their targets, but you shouldn't fall prey to such offers if you have enough funds to repay the bills. You choose the offer based on your current financial status, but the future is entirely unpredictable. Hence, prefer repaying the bills as soon as possible to avoid getting into a debt trap.

So, these are some ways to help you come out of the debt trap smartly. Once you don't have any debt, it's essential to know how you can avoid getting into a debt trap in the future. 

The right way to avoid it is to learn about good debt and bad debt.

Good Debt: Some assets require large finance altogether, which isn't possible for most people. Hence taking a loan is a good option to get a new asset and use it for commercial purposes. Such debts are considered good assets as they give you ROI. Apart from buying a commercial property, investing in higher education, starting your business, etc., are also examples of good debt.

Bad Debts: Debts that aren't necessary; still, you considered them to stay away from current financial burden is considered bad debt. Skipping full credit card payment. Skipping your regular EMIs to spend on a new home item or other necessary expenses is a clear example of bad debt. All such debts that add no value to you can be categorized as bad debt.

You should try avoiding bad debts and use your income smartly to get rid of any such debts.

No one plans to make a debt; instead, it is the outcome of unplanned actions that dump together and burden you afterward. Debt looks lucrative to the people, but it is equally dangerous as it can harm your monthly budget. 

If you are talking about a loan in a planned manner (e.g., a home loan for investment purposes), it's a good debt that delivers ROI. However, skipping your monthly credit card bills or skipping your personal loan EMI is a bad practice that can lead you to adverse outcomes. It's better to clear the debts on time and avoid getting calls from recovery agents.

Investing early is the most preferred and smartest way to prepare for debt. Financial experts always recommend preparing an emergency fund that can be used in unforeseen circumstances. So, make a smart investment planning and live a debt-free live.