Everyone desires to attain utmost comfort with respect to their finances. This does not imply that one must be completely debt-free. It is advisable to take out loans occasionally to build your credit score for your larger financial requirements.
While it may be prudent to borrow money from financial institutions, you must be sure to repay the loan on time to maintain a good credit score.
Achieving financial independence should be everyone’s goal, but getting there may need some clever navigation. Let us first understand the meaning of debt trap and take a closer look at how to navigate out of it.
What is a debt trap?
A debt trap is a circumstance where you are compelled to take out more loans than you can afford to pay off. Over time, you find yourself trapped in a scenario where your debt starts to spiral out of control and surpass your ability to repay it, and ultimately trapping you in a cycle of debt.
Example of debt trap
A classic example of a debt trap is when individuals borrow beyond their capacity to repay, leading to a cycle of escalating debt. High-interest rates, mounting payments, and inadequate income can create a situation where borrowers struggle to cover basic needs while servicing debt. This can result in more borrowing to meet immediate obligations, exacerbating the problem. For individuals, credit card debt can put them in a cycle of borrowing to pay off existing debt, perpetuating financial instability. Escaping such traps requires prudent financial management and debt restructuring.
Here are a few reasons that could cause you to fall into a debt trap:
- Your EMIs are greater than 50% of your in-hand salary.
- Your fixed costs account for almost 70% of your income.
- You have reached the limit on your credit card.
- You have multiple debts.
- You are unable to afford to set money aside for savings.
What are the indicators of debt trap?
Indicators of a debt trap or loan trap include struggling to make minimum payments, relying on credit for daily expenses, maxing out credit cards, borrowing to pay off existing debts, and experiencing constant stress about finances. Other signs may involve neglecting savings, using payday loans, or finding it challenging to reduce overall debt despite efforts.
How to come out of the debt trap?
Escaping a debt trap necessitates disciplined financial strategies. First, assess the entirety of your debts and create a detailed budget, trimming unnecessary expenses. Prioritize high-interest debts and endeavour to make extra payments whenever possible. Consolidating loans can streamline payments. Negotiating with creditors for lower interest rates or extended repayment plans can ease the burden. Professional financial advice aids in crafting a feasible repayment scheme.
Personal loan debt consolidation - A solution to get out of the debt trap
Personal loan for debt consolidation is one of the most effective ways to work towards a healthier financial situation. Having multiple loans, credit card balances, etc. is not a good for your financial independence. It is essential to plan financial needs and only take on debt that one can afford to pay back comfortably to avoid getting stuck in a debt trap.
A personal loan for debt consolidation can help in some such instances where you can identify or anticipate the downward spiral of your finances in good time.
This is exactly where personal loans can help. With a personal loan, you may pay off all your other debts with just one monthly payment. However, you must keep in mind the overall cost of your loans and its impact on your financial independence.
How a personal loan can help you to come out of a debt trap?
Coming out of a debt trap requires a strategic approach and commitment. Here is how a personal loan can help you get out of a debt trap
Payments on credit cards
A credit card is a quick and simple financing option. However, it can get pricey to have unpaid balances on several cards. You can combine your credit card debts into a single EMI by applying for a personal loan.
Multiple loans
Keeping track of repayment becomes challenging if you have taken out multiple loans. In that instance, you can get a personal loan and use that funds to settle all your outstanding debts, so you don’t need to keep track of multiple EMI payments.
Diversified tenures
Having multiple loans for various large expenses can get quite difficult to manage.It might create a confusion in planning your finances and might impact on your savings. In such circumstances, get a personal loan to consolidate all your debts and repay it over a convenient tenure that best suits your monthly financial schedule.
A personal loan to pay off debt is a smart way to get out of debt trap. This helps you not only figure out how long it will take to pay off your debt, but also manage your monthly expenses.
Bajaj Finance Personal Loan is the best option with easy eligibility requirements. You can borrow a personal loan of up to Rs. 40 lakh with minimal paperwork and speedy disbursement of funds. And you can repay it over a convenient tenure of up to 96 months. You can also use personal loan EMI calculator to know your EMIs beforehand.
