Getting into a debt trap is a serious issue and most of the borrowers don’t even realize that they are entering into this snare. But to be monetarily fit one ought to know about the signs which show that one is getting into a debt trap. There are even some debt consolidation mistakes that one should avoid doing.
A debt trap can prove more dangerous as it goes unnoticed till the person is neck-deep in it. People are even forced to go again for a loan to repay the previous loan. So, we are here to help you indicate when it is the high time to say No to a loan is, and what are the common reasons that can lead to a debt trap!
Common reasons that can lead to a debt trap:
Not finding the root cause of how you got into a debt trap.
Debt consolidation is one of the solutions to get out of the debt problem. But if you are not concerned about finding the root cause of it, you may not succeed in ending it. Also, knowing the exact reason for getting the debt may help you to change some of your spending habits. So, to get out of debt, the best thing you can do is rectify the reason for getting into it.
How to rectify the reason for getting into a debt trap:
- Go through your monthly expenses, your bills, credit card statements, receipts, etc.
- Get a breakdown of your spending to figure out where the major part of your earning is going.
- Once you’ve identified the reason, make a budget for your next month’s expense and follow it strictly.
Keep a check on your credit card uses
Credit card debts are the easiest to get into. This is because they come with huge offers and most of the people get involved in it easily. But one of the important things to know here is – the interest rate charged against credit cards is very high and ranges from 16 to 32 % annually. So, whenever you use your credit card it is necessary to keep a track of it. The second important thing to do is- to pay the credit card bills on time. Paying credit card bills after the interest-free period can impose interest on your uses and delayed payments can lead to heavy penalty imposition.
- Don’t use your credit card if you are not sure about the repayment.
- Be timely with the credit card bill payment, try to clear all the bill in the interest-free period. If not full, pay the minimum amount.
- If you are a shopaholic and get tempted by the attractive offers avoid using a credit card for shopping.
Have a Repayment plan before you borrow
Though credit cards and loans look tempting, still before you go for them, it is very important to have a repayment strategy. Use the EMI calculator before you apply for the loan, this will help you to know the estimated EMI which will help you to plan your repayment strategy.
Remember, borrowing can be easy but repaying the borrowed amount becomes tough if you have not planned for it.
- Borrow as per your repayment capacity.
- Use an EMI calculator before you apply for a loan.
- Have a plan of repayment of the borrowed amount.
- Have a strategy for the worst case (in case you don’t have income)
Lack of research & Knowledge
In a hurry to take a loan many people apply for any of it which comes first to them. This is a huge mistake and can lead to a serious debt trap if not taken care of. So, whenever you get to know that you are in need of a loan, your first step should be to do proper research work.
- Analyse your requirements
- Research well in the market
- Go with a loan/lender which suits your requirement best
- Don’t exceed your borrowing capacity
Don’t default any of the payment
Defaulting on EMIs not only imposes a late fine but also affects your CIBIL score. And if you are defaulting on your EMIs regularly, it indicates that there is a serious issue with your financial management skills which can even lead to a debt trap. So, borrow as per your repayment capacity and be timely with your payments (EMIs).
- Be timely with your EMI payment
- Don’t default
- If defaulting (in worst case inform your lender )
- Avoid taking a new loan to pay the existing one.
- If opting for a new loan think twice and calculate the total borrowing cost.