Nobody wants to get trapped in a luscious debt cycle, right? With the world moving towards more credit purchases, it is easier to become prey to this financial difficulty. The absence of financial awareness causes it to spread more quickly like disease down to many generations. Despite this, how can YOU avoid the debt trap?
WHAT IS A DEBT TRAP?
Debt is the amount of money that is a liability and due for you to pay back to its rightful owners in a specific period. A debt trap is a situation where you are compelled to take more loans to make payments for your previous loans.
That turn into a vicious cycle as you continue to add to your debts just to make payments. Thereafter, every financial decision you takes adds to this spiral cycle.
You can fall into this debt trap due to unforeseen events. You may want to fund your higher education or meet any unpredictable emergency. Either way, if your income is not enough to cover up the amount you get and the interest you have to pay on it, then it could directly lead you to this trap.
HOW DOES THE DEBT TRAP WORK?
When taking out a loan from the financial institute, two elements play a more noteworthy part in determining your future financial stability than others.
- The amount of loan you have taken
- The interest on that amount
If you can have to pay every month with interest then you have to be careful. As you are charged interest on the loan amount. So, if you can not repay that amount with interest each month, your debts would never fall, and payments would skyrocket.
Let’s say, if your income is not enough to repay the amount of interest, you might take out another loan. That would pile up your loan amount, thereby, rising interest payments and repayment amount.
And the cycle goes on and on…
WHAT CAUSES A DEBT TRAP?
Although it is mostly impossible for people to notice they are drowning in debts. Still, there are some indications that could alert you of the danger that you are moving towards the trap.
- KEEPING A CHECK ON CREDIT CARD
It may seem that credit cards give economic empowerment, but this more effortless access to credit cards results in this death trap. The interest rate on a credit card is usually high. It is between 16% to 32%. Thus, keeping a check on your credit card is vital.
If you have reached your credit limit, then you may be moving towards the debt trap fast. For that reason, it is crucial to keep an eye on your credit limit and control unnecessary expenses as much as possible.
2. YOU HAVE MANY LOANS
It can be possible that you might have a portfolio to get loans from money lenders quickly. But, it is important to tame this temptation. The more loans you get, the tougher it will be for you to repay interest with the amount over it.
Over and above, if you miss any of the payments of the month, it would be a burden for you next month. So, it is better to have your banks keep a check on your loans and their payments so that you know what you owe.
3. A HUGE CHUNK OF YOUR INCOME GOES TO THE CREDIT PAYMENTS
Every month, if you have to pay more than 50 % of your income to your monthly payments, and you spend more than 70% of your icome on fixed expenses. Then, you might be racing towards the debt trap sooner without knowing.
Instead, it is better to lower your debt amount by figuring out a way to pay for it so you may be able to lessen these interest payments.
WHAT YOU CAN DO TO AVOID IT?
You may be financially unaware of the debt trap but discovered it now. Do not worry! There are some ways to ease the effects of the debt trap on your financial life.
WAYS TO REDUCE DEBTS
- Try to repay the debt with the highest interest first. Although it would be challenging to repay a huge amount, repaying it would give you a lot of relief from the pressure of debt.
- Another strategy is to repay the small debts first. It would help you to get a sense of achievement, permitting you to make rational decisions for your financial life.
- Cut off unnecessary expenses on your credit card. It is critical to examine what made you move toward your credit limits. Try to reduce expenses on consumer luxury goods.
- Try to reduce your fixed expenses. That would entitle you to have more spare money to pay out your liability as quickly as possible.
INCREASE YOUR INCOME
It may be possible that you may not have enough income to pull yourself out of this bog. So, try to get another job to earn some extra cash aside from your regular job. That would allow you to clear your debts quicker.
In long term, your burden of debts would reduce, and you would rescue yourself from sinking deep into the debt pile. Moreover, beware of the Income and economic shocks. They are the situations such as the loss of a job, that would make you incapable of clearing your debts and maintaining your current standard of living.
For that reason, you should have some funds pulled aside to help you fulfill your monthly payments without missing a beat.
AVOID MORE LOANS
It is the most basic advice anyone can give you regarding debt traps. It can be alluring to get more money through loans for debts without realizing the great loss you would suffer. So, try to stay away from anyone who makes “more loan idea” helpful.
Simply because it is not. You will just have more burdens to pay than before pulling you deep into the ocean of debts.
HAVE A LOAN PROTECTION INSURANCE
Who would want your family to suffer due to your loans? This is therefore a sound idea to have term protection or loan protection insurance. This would prevent your family from suffering, after your demise, by joining the endless cycle of loans.
GET SOME PROFESSIONAL HELP
One of the best ways to get out of a debt trap is to get professional help. It may be possible that you are creating more problems for yourself than necessary, due to a lack of financial awareness. Getting a professional consultant on board may help you find areas where you are lacking. They will also furnish you with ways to get back to a secure financially healthy life.
So, why wait for the situation to get worse? Get yourself a consultant no matter if you are in severe condition of debt trap or you think you can handle the situation. Paying a few bucks is still better than working day and night to pay thousands of bucks in debt.
CONCLUSION
Credit cards and loans can be tempting for many people due to the way it is displayed in the world. But, the harsh reality behind these debts is hidden behind the doors. No one can feel the burden of debt more than the ones suffering.
Using these credit offers is not bad. But, you should have a hold on your spending. Budgeting and keeping a track of your income and expenses may give you a clear picture of your future financial health, which lies around the number. Therefore, make rational decisions and know what is best for you.
