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A loan can help you out a lot, but bad debt can put you in a lot of trouble. Simply put, a debt trap is a situation in which debt is almost impossible to repay due to high interest rates, limited financial resources, and various loans with multiple EMI payments. On the other hand, debt can be effectively managed if you gain a thorough understanding of its complexities. So, on this Independence Day, let us learn how to break free from the debt trap and live financially stable lives. Continue reading!
1. Recognise the problem
If you have many credit cards and have surpassed or are about to exceed your credit limit on one or more of them, you are likely to be in debt.
A greater danger is missing EMI payments and incurring charges on larger quantities. When you are unable to repay your debts regularly, and it seems that you will not be able to do so soon, it becomes a debt trap.
It’s a major red flag if your total debt from various sources exceeds your invested corpus, liquid assets, and all other investments and, more significantly, constitutes a significant portion of your salary.
2. Prioritise debt
You may have short-term or long-term debt. Credit cards and personal loans are examples of short-term debt, while home loans are examples of long-term debt. Start attacking loans that are more costly in terms of interest rates, overhead costs, and fees after you’ve divided debt by tenure.
Long-term loans, such as home loans, have a lower interest rate. On the other hand, credit card loans may have annual interest rates as high as 35-40%. Failure to pay credit card bills on time incurs a monthly interest charge, as well as a slew of other fees that may raise the risk of overuse.
3. Fill the gaps and make a payment plan
If you’re having trouble saving money, start by keeping track of your expenses. Reduce your spending on non-essential items such as leisure trips, movies, and luxury purchases. Try to develop inventive ways to reduce your everyday costs, such as carpooling, taking a taxi to work or consuming home-cooked meals instead of ordering takeout.
If time allows, you can even consider taking on side jobs to supplement your income. Although this may seem to be a challenge, keep in mind that it is only temporary, and you won’t have to limit yourself until your finances are back on track.
4. Have ample insurance coverage
Purchase appropriate insurance to protect yourself and your family from catastrophic incidents. The quicker you purchase insurance, the lower your premiums will be. Getting insurance allows you to put all of your money into paying off your debts instead of worrying about rising healthcare costs.
5. Ask your bank to extend your loan term
If you have a home loan, you can ask your bank to extend your loan term. While this will raise your interest rate, it will lower your monthly EMI payments and give you more time to pay off your debts. You should even try negotiating the interest rate with your bank if you have a long-standing partnership with them. Alternatively, consider moving your current loan to a bank with a lower interest rate.
6. Raise your payments and EMIs contribution
To pay off your loans faster, you can double your contribution towards EMI’s proportionally to the hike in salary.