How To Get Out Of Debt Trap?

Someone once said, “The only man who sticks closer to you in adversity than a friend is a creditor.” A debt trap can be one of the worst situations that a person can find themselves into. Everyone wants to have complete control over their lives, especially their finances, which are central to one’s existence.

While it may be very tough for most people to be completely debt free, especially when they are starting out on their professional journey, one should ideally always remain in control of one’s debt payments as well as finances in general and should avoid getting caught in a debt trap.

What Is A Debt Trap?

Simply put, a debt trap is a condition when one is forced to avail of more loans than they can actually afford to repay. Over time, such people find themselves trapped in a situation where the debt burden begins to spiral out of control and they cannot fully repay their debts. In effect the debt obligations surpass their ability to service them. This ultimately leads to the person being trapped in debt cycle that they cannot seem to get out of.

Is All Debt Bad And Does It Inevitably Lead To A Trap?

Not really. Not all debt is bad and not all debt can trap a person. A borrower must, however, make sure that they do not borrow beyond their ability to repay. In fact, a borrower should attempt to repay their debt, in time and in full, so that their credit score does not get impacted adversely, for if that happens, their ability to borrow more in future gets severely impacted.

How Does One Get Into A Debt Trap?

As explained above, a person gets into a debt trap when his or her ability to pay back the debt exceeds the debt obligation itself. This eventually leads to a cycle of escalating debt in which they are forced to borrow more to pay back previous loans. A debt trap is a situation that is typically created by high interest rates, insufficient incomes and mounting debt repayments.

In the worst-case scenario, a debt trap can lead to a situation when often times, borrowers cannot even pay for their basic needs while trying to pay back loans. They are then forced to borrow even more, to pay off existing debt and also keep paying their bills every month.

A person can get into a debt trap if:

1. Their EMIs are higher than half their carry home monthly incomes
2. Their fixed costs account for a lion’s share of their incomes
3. They have maxed out their credit card limits
4. They are trying to service multiple kinds of loans at the same time
5. After paying their bills and servicing debt, they are left with no money that can be saved and invested

How Do You Know That You Are Caught In A Debt Trap?

The moment you find that you are unable to even make minimum payments on your credit card outstanding or that you are having to rely on your credit card even for day-to-day expenses or that you are having to borrow more to repay existing debts, you are in a classic debt trap. Other signs that you are in such a situation may include reliance on payday loans or the fact that you are having to mortgage your family’s gold, land, house or other assets, to service debt.

How Can One Come Out Of A Debt Trap?

To come out of a debt trap one needs to manage one’s finances prudently. Often the situation may be so dire that a person may need to restructure their debt and consolidate their loans in order to get into a lower interest rate regime and reduce the outgo on interest payment.

To escape a debt trap, one needs to adopt disciplined financial strategies. As a first step one needs to take stock of the entirety of one’s debts, build a detailed budget and also try as much as possible to cut back on expenses that may be necessary. One also needs to make tackling high interest debt a priority and try and make extra payments towards debt servicing whenever possible. This would typically mean that when one gets, say, some extra bonus, one should try and move that money towards debt repayment, so as to reduce the debt burden by as much as possible.  

Consolidating loans can help streamline payments. One can also negotiate with creditors for lowering interest rates, partial waivers or even extending payment plans so as to ease the debt burden and pay off the loans quickly. One should also look to sell some assets in order to pay off the debt in whole or in part, as fast as possible.

Should One Take A Personal Loan For Debt Consolidation?

Indeed, a personal loan for debt consolidation could be one of the best ways in which one can make one’s financial situation healthier and can simplify the repayment process. Having multiple loans, credit card debt etc is not particularly good when it comes to one’s financial independence as such multiple loans having different interest rates, can severely constrict one’s ability to save any money after paying off one’s bills and then servicing all of this debt.

A personal loan can help one pay off all the other debt. Once this is done all one needs to concentrate on is just one loan repayment. All one needs to do is to ensure that the cost of taking out a personal loan is lower than the combined cost of all the other loans that one may be carrying.

A personal loan typically carries a lower interest rate than credit card debt and so can be a cheaper option to clear all outstanding credit card payments that may be attracting usurious interest rates. 

A persona loan also helps as it can rid one of the need to keep track of multiple loan repayments. Moreover, since all of those multiple loans would have different tenors, they could play havoc with one’s financial planning.

What Are Other Smart Ways In Which One Can Come Out Of A Debt Trap?

First, one needs to stop taking any more high-cost debt. This is a no brainer as getting out of a debt trap would necessarily require one to stop taking on fresh debt as doing so could be counter-productive.

Second, one should prepare a proper budget for the month and stick to it. One has to ensure that there is no bloating of expenses.

Third, one must focus on increasing one’s income so that any outstanding debt can be paid off easily. One way of increasing one’s income is by taking on extra gig work over the weekend or whenever one can get some time off work.

One should also look for transferring one’s outstanding credit card debt to a card offering a lower interest rate, in a bid to bring down the interest outgo. Apart from this one should also try and pay off all the outstanding credit card debt as quickly as possible.

Finally, if one thinks that despite all efforts it has not been possible to get out of a debt trap, one should ideally seek professional help. To do this one can approach professional debt counselling agencies that provide advisory services. Some such agencies help make a budget and set expenditure limits. Some of these agencies may also negotiate with creditors on your behalf and assist in lowering interest rates and restructuring the loan.  

Conclusion

The first rule of getting out debt trap is to acknowledge that you are in one. Most people taking evergreening of loan casually, until they are not able to get any more loan to pay off the previous debt. They first start missing out on principal payment and then they can’t even service interest. If one were to fall into a debt trap, they should carefully analyse their finances and follow a disciplinary approach towards budgeting etc.