A Debt trap is a situation where you’re forced to take new loans in order to repay your existing debt obligations. And before you know what a debt trap is, you fall into a situation where the amount of debt you owe takes a turn for the worse and spirals out of control.
Such a situation typically arises when your debt obligations exceed your repayment capacity.
For instance, the income you generate is insufficient to clear your debt; the interest standing up on your outstanding loan amount will start to pile up quickly.
This will eventually lead you to avail fresh new loans to clear off the piled-up interest, thereby falling into a debt trap.
Clear All Your Expensive Loans First
If you’re dealing with multiple expensive loans and can’t handle all the loans simultaneously, then the best way to slow down stress is to pick loans that have a higher cost and clear them off first.
These loans can be your unsecured loans, such as credit card bills. However, other loans such as home loans and education loans that offer tax benefits also come in the line.
Meanwhile, to settle things, you need to bring some financial discipline: staying away from debt, making timely payments of EMIs, eliminating unnecessary expenses, and more.
Being a financially disciplined investor will help you save money and stop going deep into debt.
Safeguard Yourself against Economic Shocks
Income and Economic shocks are those circ*mstances where you don’t have the minimum income required to continue and sustain your current lifestyle.
For example, the loss of your current job will eventually lead to loss of income. And due to Loss of income, you will be unable to meet regular expenses such as your EMIs or loans.
Instead of falling into economic and income shocks, make a plan and collect sufficient liquidity to save for all the situations.
Create an emergency fund that can help you fight against such situations. However, your emergency fund should be five times more than your current monthly income locked in a fixed deposit or liquid mutual fund.
Restructure and Consolidate all Debts
If you have multiple loans with different tenure, you must talk to your bank to consolidate these loans into one and restructure the interest and tenure accordingly.
Doing this will help you lower the interest rate. You may also negotiate with the bank to increase the tenure in order to reduce the magnitude of the EMI.
Insure Yourself Against Unforeseen Events
Insurance is the best thing to opt for when it comes to protecting your family against unforeseen events. Taking term insurance or a loan protection policy will help ensure that your family income needs will be taken care of and all your loans will be settled in case there’s a sudden demise of yours.
This would, therefore, help your family achieve such goals as homeownership. In addition, having adequate insurance against such can help your debt repayment to get back on track.
Start Budgeting Your Expenses
Creating a tight budget and stepping down from your current habits and lifestyle is a crucial step that can help you save some money.
Reducing the number of unwanted expenses you make leaves you with a surplus amount, which can then be used to pay off your monthly debt obligations and EMIs.
Furthermore, doing this will also help you save money on the side, which you can use to make part and lump-sum payments later on.
Seek Professional Help to Get Out of the Debt Trap
One of the best ways to get out of the debt trap is by seeking professional help or advice from the professional. You can opt for several professional debt counseling agencies that provide advisory services.
Counseling agencies can help you create a budget and set expenditure limits. However, some agencies may also negotiate with creditors on your behalf and assist in lowering interest rates and restructuring your loan.
