Today, the need for additional financial requirements can be solved by availing of different types of loans. There are various types of loans that can help you meet various financial requirements, such as Personal Loans, Professional Loans, Business Loans, etc. However, if you mismanage your debts, there is a high risk of falling into a debt trap from which you may find it impossible to get out. This blog provides steps on how you can avoid falling into a debt trap.
A debt trap occurs when a borrower is forced to avail new loans just to pay off existing loan. It happens when the amount of debt becomes too much to handle based on one's ability to repay. When repaying a loan, there are two parts: the principal (the initial amount borrowed) and the interest (the additional cost of borrowing). These are paid off over a fixed period.
It is important to realise that a debt trap is not solely determined by the size of loan. Even a big loan can be manageable if the borrower's income is sufficient. The key factor is whether the borrower can make the EMIs on time. If payments are missed or delayed, the interest keeps adding up, increasing the overall debt. In such a situation, borrowers may find themselves taking out new loans to repay the old loans.
Even a small loan can lead to a debt trap if it cannot be repaid on time and the interest keeps adding each month. Other circumstances, like taking an expensive short-term loan to solve an immediate financial problem or experiencing an unexpected loss of income, can also contribute to falling into a debt trap.
Postponing debt repayment in the hopes of receiving more funds or defaulting on loan commitments due to unforeseen circumstances can further worsen the situation. Avoiding a debt trap is crucial as it has multiple negative consequences, including financial problems, damage to CIBIL score, along with emotional and social issues. Managing funds effectively and making timely repayments are essential to prevent getting trapped in a cycle of debt.
To protect yourself from falling into a debt trap, you need to identify the red flags in your financial situation. If you notice even one of the causes mentioned above, it is necessary to seek help immediately.
Another measure you can take to avoid getting into a debt trap is to have a budget. A monthly budget that accounts for your income and expenses ensures that you are spending within your means. Ensure that you allocate money for essential expenses like housing, utilities, and groceries, and reserve some for saving. By adhering to your budget, you can steer clear of excessive and unnecessary spending.
Although getting out of a debt trap might take time, it is completely doable. You can follow these procedures to fix the issue
In conclusion, you should be responsible while taking charges of your finances to avoid a debt trap and attain financial freedom. You should use loans for important financial objectives, but it is important to repay them promptly to protect yourself from steep interest rates and debt traps.
Debt is the borrowed money that needs to be repaid within a specified period while a debt trap occurs when a borrower struggles to repay multiple debts, leading to financial distress and difficulty in escaping the cycle.
Below are the two factors responsible for the debt trap
Personal Loans are a great way to acquire high-value funds when an individual is facing a liquidity crisis. As the name suggests, a Personal Loan can be used for a variety of purposes that are unique to each borrower.
A firm (business or professional practice) often needs funds to continue with its business operations or bridge a small gap in its working capital. At such times, the business uses one or the other methods to raise funds.
Business owners are always required to have strong financial acumen and knowledge because a lot depends on their ability to infuse capital efficiently into their venture.
A Personal Loan can be of great aid as it can provide funds for additional expenses such as payment of rent, medical emergencies, wedding decorators, etc.