What is debt trap? 7 smart ways to manage your debts effectively

Debt Trap: People today have easy access to credit cards, overdrafts, personal loans, car loans, home loans and other source of funding. The lack of financial discipline often pushes people into debt as they take multiple loans from various sources. If they miss paying their even one EMI, it can cast a slur on credit score.

If you are among those who are saddled with too many loans, we will tell you tips to follow for a debt-free future.

Jyoti Bhandari, Founder and CEO, Lovak Capital said, "One of the key step to overcome debt trap is to identify your wants and needs. Evaluate the budget for your needs and stick to it. Before every spend, ask yourself if there is any less expensive alternative?"

"Allocate an investment in to a shorter duration debt fund through monthly SIP to save for your cheaper loans with a time period in mind. Make a goal plan to pay your bill expensive loans prior to cheaper loans. Explore options to generate a passive income by allocating some time and monetize your skills to pay off your debt. It will create an additional income to pursue your passion or creating long-term wealth," she added. 

What is a Debt trap?

Harish Parmar, founder, SingleDebt, said that a debt trap is a situation where someone is forced to apply and take further loans to repay their existing debts, usually at a higher interest rate. Over time, they get stuck in a situation where the debt and interest spiral out of control, exceeding repayment capacity and making them fall into a debt trap.

1. Prioritise needs

Determine where your financial condition and needs. Keep a record of how much money is coming in and how much is going out. Avoid non-essential or semi-essential purchases and work out how much you owe. Identify the most urgent debts. Create a budget by adding up your essential living costs.

2. NO extra borrowings

Avoid borrowing more while you have already borrowed excessively. Borrowing more to pay off the running debts will land you in trouble. 

3. Saving

Keep tabs on your spending and start saving from your income. It is suggested to bank 5 per cent of income into a fixed deposits (FD) account. In time of an emergency, one can easily borrow a loan against FD. This is the cheapest way to borrow.

4. Pay dues on time

Paying EMIs or bills on time and in full is prevent you from falling into a debt trap. Paying only the minimum amount may sound appealing, but continuing this behaviour for a long could affect your financial condition.

5. Check limits

Always monitor your credit score if you want a secure financial future. Make a point of requesting your credit report every three months, or as soon as a loan account has been closed. Verify that the information is accurate and meets your expectations.

6. Build an emergency fund

Maintaining a corpus that you may use in case of an emergency is vital. People typically borrow money when they suddenly require a sizable sum of money for an emergency. You can avoid falling into a debt trap if this pattern is broken.

7. Seek professional help

If you believe you won't be able to pay your bills or are finding it difficult to manage your expense, get help right away. You are not alone, a qualified and trained debt adviser can walk you through your options.

Sovan Satyaprakash, Head of Strategy and Business Intelligence, Aye Finance said, "Achieving financial freedom requires planning and diligence. A debt trap can act as a major obstacle in the pursuit of financial freedom, and it is imperative to avoid a situation where one’s debt obligations surpass their repayment capacity."

"The detrimental effects of a debt trap extend beyond deteriorating credit scores, and can often lead to psychological and social issues for individuals. It is imperative to plan current and future expenses, and creating emergency funds can be a helpful tool in avoiding a debt trap. Ensuring that one has savings equivalent to 6 months’ salary set aside for emergencies can prepare an individual to deal with a crisis better and avoid incurring unwanted debt," he added. 

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