If you’re looking for ways to avoid debt traps, you’ve come to the right place. In this article, we explain what a debt trap is, what causes it, and how to avoid falling into it.
Things are easier to own these days, but they come at a price. With ever-increasing living standards but disproportionate salaries, people are drawn into the world of debt and some remain trapped there.
So what is a debt trap? Let’s see.
What is a debt trap?
Simply put, a debt trap is a situation where your debt spirals out of control.
As people become more comfortable borrowing, they become increasingly vulnerable to debt traps.
There can be many reasons or causes for this, ranging from emergencies to gross negligence or lack of planning.
Over time, your debt and the interest on it will continue to pile up, requiring you to borrow more to pay off the existing debt.
This starts a cycle that is almost impossible to get out of. As this situation progresses, your ability to repay the debt continues to decrease.
What Causes a Debt Trap?
As mentioned earlier, debt traps can be caused by emergencies, poor investments, or even poor planning. These situations can range from things that are completely out of control to things that arise out of ignorance.
Let’s look at some of the most common factors below:
Now that we know the causes, let’s see how we can avoid these debt traps.
How do you avoid a debt trap?
1. Analyze the problem
The very first step in solving a problem or dealing with a problem is to analyze it. Only by analyzing a situation can you control it and find a solution.
In certain cases, you may find a solution simply while evaluating your situation. Even if it doesn’t, you can create an action plan to work towards getting out of the debt trap.
2. Set a budget to prioritize your needs
This brings us to the second point, which is to budget for your expenses and prioritize your needs. If you analyze your budget carefully, you will find that it contains some expenses that you do not need.
We are all guilty of spending money on whims and fantasies and sometimes it gets out of control hence the debt trap we find ourselves in.
The trick to figuring out your needs is to be honest with yourself. Understand your needs, wants, and likes, prioritize your needs for a while until you get out of the debt trap, and stick to only those expenses.
3. Consolidate multiple debts into one
People typically take out multiple loans because they need different amounts of money at different times or for different reasons, and fall into debt traps because they don’t realize how big those little piles of debt are.
The best way to get rid of this debt is to consolidate it into one. We agree, it sounds like you have one huge loan instead of multiple smaller loans, but the amount doesn’t decrease.
However, when you consolidate your debt, you only have to pay EMIs on one loan and one interest rate on the entire loan amount.
Personal loans (like salary loans) are a great way to consolidate your debt and start paying off easily. They are quick loans that you can also get conveniently.
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4. Build an emergency fund
An emergency fund is a must for all of us to fall back on in emergencies and otherwise.
Ideally, it is an amount of money that can sustain you for 3 to 6 months when you are short of money. This can also come in handy for paying off your debts should you need to.
This option is better than taking out another loan to pay off the existing debt.
5. Stick to a savings routine
There are numerous savings options that people use to build their savings, but one size doesn’t fit all. For some, the 50-30-20 rule will suffice; others use the 80/20 rule and can save big.
You should find what works best for you and stick to it.
Don’t keep experimenting with different methods once you’ve found one that fits your budget well.
6. Avoid credit card offers
Credit cards are one of the easiest ways to get into debt traps because when you have a credit card, it’s easy to spend a lot of money without considering it a loan or credit.
Credit cards provide and encourage this and lure people into debt without them realizing it. In order not to fall into a debt trap, it is better to avoid credit card offers.
7. Numbers Complete your credit card statement every month
Just think of this as an extension of the previous point. If you pay off your credit card bill in full every month, you don’t fall into a debt trap, as most people don’t realize that it’s harder to pay back the principal they’ve accumulated on their cards.
They end up paying only the interest or minimum payments (small portions of their debt) of the bills. This in turn increases the existing debt.
8th. Only borrow what you need
The debt trap occurs when your debt exceeds your income or your ability to repay it, so it makes sense to only borrow the amount you absolutely need if you don’t want to fall into it.
In fact, you should pay off your loans in advance if you can. That makes it cheaper for you in the long run.
9. Keep your credit score strong
People who fall into debt traps damage their credit score after they are unable to repay their loan on time.
The same financial habits that people follow to maintain their credit scores should be followed to avoid falling into a debt trap.
10 Get professional help (if necessary)
If you find it too difficult to get out of a debt trap, you can contact a professional who will help you plan your budget better and manage all your debts in the best possible way.
Some professionals can even help you negotiate with your lender and make your loan terms much more favorable to you.
How can debt consolidation be a better choice to get out of the debt trap?
We’ve talked about debt consolidation before, and here we’re going to dive into the concept and how it can benefit you more than any other option above.
These reasons make debt consolidation one of the best decisions you can make to get out of the debt trap as efficiently as possible.
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We hope that it is now clear to you what a debt trap is, the reasons it can cause, and how to avoid falling victim to it. We recommend consolidating your debt with an instant personal loan, which can make paying off all your debt easier.
In case you need help figuring out how to get a personal loan that can potentially help you get out of a debt trap or other financial crisis or hardship, you can contact [email protected] or 080-44292200.
