Loans have become an important financial tool on which more than 50% of the population depends. Whether it is some urgent financial requirement or the willingness to avail some luxuries such as an updated gadget or to finance the most awaited trip, availing loans can help you to get all these.
What makes loans so easy-going?
Easy availability, minimum eligibility requirements make loans more affordable to the common masses, and hence they often go for it as per their requirements.
What are debt traps?
Debt traps are an intense issue and it is mostly delayed to understand.
Generally, most of the borrowers don’t even realize that they are getting further into this snare. Consequently, to be monetarily fit one ought to know about the signs which show you are getting into a debt trap.
A debt trap can prove more dangerous as it goes unnoticed till the person is neck-deep in it and at that point in time one goes again for a loan to repay the previous loan. We are here to help you and indicate to you when it’s high time, and when you should say No to loan to avoid a Debt Trap!
Signs which indicates that you are getting into a Debt Trap
Taking loans for your regular expenses!
Few people even take loans to meet their normal expenses.
For example, when someone is short of money at month-end, they start using their credit cards, some even opt for a personal loan to fulfill their requirements.
But do you know, it is very risky and can even lead to a debt trap. Borrowing money in this way may help you that point but in the long term paying the interest for the borrowed money becomes tough. This is because you need to repay much more than what you borrowed.
Hence borrowing money often is a clear indication that you are getting into a debt trap.
Availing one after another loan to repay the previous one!
At the point when you go for a credit, it is essential to know your repayment limit. At times, individuals borrow more than their repayment limit, then it gets hard for them to repay it back. Borrowers start defaulting the EMIs in this case and as a result, need to pay penalty charges. If this continues a situation arrives when the borrower is left with no other choice than borrowing money again to repay the ongoing debts.
If this happens with you, it is an indication that you are getting into a debt trap. To avoid such a situation, always borrow wisely and most importantly according to your needs and repayment capacity.
Using an EMI calculator before applying for any kind of loan can also help you to avoid debt traps.
Missing Bill Payments and EMIs
Financial crunches may force you to skip some of your bill payments. This is acceptable once or at most twice a year. Beyond that, you will be charged penalties and late payment charges. Once this starts the extra payment which you have to make can affect your monthly budget which can end up with borrowing money again.
This is also an indication that you are not managing your finances well, and it’s high time that you start working on your finances as the circle of debt may start if the situation remains the same.
Hence, try to be timely with all your EMI payments to avoid getting into a debt trap.
When your EMIs Exceed 50% of Your Monthly Income
Offers, discounts, low EMI sounds very tempting and many of us couldn’t resist and end up taking a loan. But all these are marketing strategies and if you get into it without thinking twice it can even lead to a debt trap.
If you have more loans and the EMIs exceed 50% of the monthly income then it is a clear threat for your long term financial goals.
Paying more than 50% of your income towards EMIs can ruin all your financial management for a long time and can lead you to a debt trap. Also, a FOIR of 50% and above reduces the chances of getting a loan in times of emergency.
These are the few common signs which indicate that you are getting into a debt trap. To avoid such a situation always borrow as per your repayment capacity and avail a loan only and only if you think it is the only option left.