What Is Debt Trap and How To Get Out Of It?

Achieving financial independence should be everyone's goal, but getting there may need some clever navigation. The biggest challenge many face is falling into a debt trap—a cycle where borrowing spirals out of control. Understanding what a debt trap is and how to escape it is crucial for financial wellbeing.

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, ultimately trapping you in a cycle of debt.
 

The danger of a debt trap lies not just in the money owed, but in the psychological and financial stress it creates. Many individuals caught in debt traps find themselves unable to save, plan for the future, or achieve their goals.

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 create a situation where borrowers struggle to cover basic needs whilst servicing debt. This can result in more borrowing to meet immediate obligations, exacerbating the problem.

Typical scenario: For individuals, credit card debt can put them in a cycle of borrowing to pay off existing debt, perpetuating financial instability. An individual might start with a Rs. 50,000 credit card balance at 36% p.a. interest. Unable to pay in full, they only pay minimums. Within months, interest charges push the balance to Rs. 70,000. To manage this, they take another loan, and the cycle continues.

Warning signs: Escaping such traps requires prudent financial management and debt restructuring. The longer you remain in a debt trap, the more severe the consequences become—affecting your credit score, mental health, and financial future.

Reasons you could fall into a debt trap

Understanding the causes of debt traps helps you avoid them. Here are common reasons:
 

• High EMI-to-income ratio: Your EMIs are greater than 50% of your in-hand salary, leaving minimal funds for other expenses.
• Excessive fixed costs: Your fixed costs account for almost 70% of your income, limiting financial flexibility.
• Maxed out credit cards: You have reached the limit on your credit card, forcing you to seek additional credit.
• Multiple debts: You have multiple debts with varying interest rates and due dates, making management difficult.
• No savings buffer: You are unable to afford to set money aside for savings, leaving you vulnerable to emergencies.

• Struggling with minimum payments: You find it difficult to make even the minimum payments on your debts.
• Relying on credit for essentials: You use credit cards or loans for daily expenses like groceries or utilities.
• Maxing out credit cards: Your credit cards are regularly at or near their limits.
• Borrowing to pay existing debt: You're taking new loans to pay off or service existing debts.
• Constant financial stress: You experience ongoing anxiety and stress about your financial situation.
• Neglecting savings: You've abandoned savings plans and emergency funds.
• Using payday loans carelessly: You're relying on payday loans or other high-cost borrowing options.
• Debt continues despite efforts: Despite your best efforts, your overall debt is not reducing.

• Step 1: Assess Your Situation: Create a comprehensive list of all your debts including amounts, interest rates, and monthly payments. Use the personal loan eligibility calculator to understand your borrowing capacity.
• Step 2: Create a Detailed Budget: Document all income and expenses. Identify areas where you can cut unnecessary spending to free up funds for debt repayment.
• Step 3: Prioritise High-Interest Debts: Focus on paying down debts with the highest interest rates first, as these cost you the most money over time.
• Step 4: Make Extra Payments: Whenever possible, make additional payments beyond minimum amounts to reduce principal faster and save on interest.
• Step 5: Negotiate with Creditors: Contact creditors to negotiate lower interest rates or extended repayment periods to make payments more manageable.
• Step 6: Consider Consolidation: Explore personal loan consolidation options to streamline multiple payments into a single monthly instalment.
• Step 7: Seek Professional Advice: Consider consulting a financial advisor who can craft a feasible repayment scheme tailored to your situation.

Personal loan for debt consolidation is one of the most effective ways to work towards a healthier financial situation. Having multiple loans and credit card balances is not conducive to your financial independence.

It is essential to plan financial needs and only take on debt that you can afford to pay back comfortably to avoid getting stuck in a debt trap. A personal loan for debt consolidation can help in situations where you can identify or anticipate the downward spiral of your finances in good time.

Key insight: Personal loans can help you consolidate multiple debts into a single monthly payment, making it easier to manage your finances and potentially reduce your overall interest burden.

✅ Check your pre-approved loan offer with phone number and OTP → Apply online in 5 minutes → Receive funds within a day*.

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. You can also use personal loan EMI calculator to know your EMIs beforehand.
   

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.