Being trapped in a debt cycle is an extremely serious issue, and most borrowers do not even have the realization that they are going to be in this snare. However, to be fit monetarily, you must understand the signs which indicate that you are falling into a trap. There are also a few debt-consolidation mistakes that you avoid committing.
A debt cycle can come across as a dangerous medium as it becomes unnoticed till you neck deep into the same. Individuals even are propelled to go again for the loan to make the payment for the earlier loans. Read on to understand the popular reasons for being trapped in a debt cycle –
Not knowing the root cause of how you are in the debt trap –
Debt consolidation is a solution to get out of debt cycle issues. However, if you are not at all concerned regarding finding out the root cause of it, you might not succeed in closing it. Also, being aware of the exact reason for being involved in the debt might assist you in changing a few of your habits linked with spending. So, to be out of the debt trap, the suitable thing to do is correct the reason because of why you are into this trap.
How can you correct the reason for falling into a trap –
∙ Go through the monthly expenditures, your bills, receipts, credit card statements etc.
∙ Get a breakdown of all your spending to understand where the major chunk of your earnings is exactly going.
∙ Once you have identified the reason, form a budget for your month’s expenditure and follow it stringently.
Keep a thorough check on the usage of your credit card
Getting into credit card debts is one of the easiest. It is because they come with massive offers, and many get involved in it easily. However, one of the crucial things you must know here is – the rate of interest levied against credit cards are extremely high and may range anywhere between 21 and 52 per cent p.a. So, whenever you use a credit card, it is important to keep a thorough track. The next crucial thing you must do is to pay your credit card bills by the due date. Paying your credit card dues after an interest-free period may impose interest on swiping it, and any delayed payment can result in levying of heavy penalty. Avoid using your credit card in case you are not sure about your repayments.
∙ Remember to stay timely with your credit card bill repayments; try and clear it off during the interest-free period. If unable to repay the full, make at least the minimum due payment.
∙ In case you like shopping and often get tempted by various attractive discounts and offers, avoid using your credit cards on such occasions.
Create a repayment plan or schedule before you borrow
While loans and credit cards appear tempting, still before you avail them, it is necessary for you to have a replacement plan in place. Use an online EMI calculator before you place the application for a personal loan. Doing so will assist you in knowing about the estimated loan EMI, which will assist you in planning out your repayment strategy better. Note that borrowing a 5 lakh loan or a 3 lakh loan while appear simple, but repaying the same borrowed amount becomes extremely difficult if you do not plan well.
∙ Borrow according to your repayment capacity
∙ Use the online EMI calculator before applying for a loan
∙ Form a repayment plan linked with the borrowed amount
∙ Have a perfect strategy in place to deal with worst cases
Lack of research and knowledge
In a hurry to avail loan, many of you avail of the loan that comes to you first. This is a major mistake that you make, as it can result in a serious debt trap if you do not take care of it. Thus, whenever you get to know that you require a loan, your initial step must be to conduct proper research.
∙ Analyze your requirements and needs
∙ Research well in the market
∙ Go with the lender or financial institution which matches your need the best
∙ Do not surpass your borrowing capacity
Do not default on any payment
Defaulting on loan EMIs not just imposes a late fine but even impacts your credit score. And if you default on your loan EMIs periodically, it shows that there is an extremely serious issue with your financial management skills. This can result in a debt trap. So, you must borrow according to your repayment capacity and timely repay the EMI.
Thus, follow the listed –
∙ Be timely with your repayments
∙ Do not default
∙ If defaulting, in the worst-case scenario, ensure to inform the lender
∙ Do not take a new loan to repay your existing one
∙ If you are going to opt for a new credit option, just give thought again to computing the overall borrowing cost
How can you come out of the debt –
Determine your issue and analyze it
A meticulous and detailed review can help provide answers to your prevailing debt scenario –
Here is what you must do –
∙ Initially, you must acknowledge and admit that you have a debt issue
∙ Recognize areas that are creating a fall into a debt trap
∙ Form a plan and work around it
∙ Prepare the budget and prioritize your requirements.
Make the budget and then prioritize your requirements –
After you thoroughly analyze your debt situation, you might now identify the essential, non-essential and semi-essential expenditures.
∙ Form a priority list of all your requirements.
∙ Make debt repayment your initial priority as this can form a positive as well as a long-term impact on your financial scenario.
∙ Refrain from indulging in any non-essential or semi-essential items at least till you get back on track.
Choose debt consolidation option –
In place of repaying distinct loans at distinct times in a month, you can consider going for the consolidation option, wherein you must consolidate all your high-interest debt by availing of a low-interest personal loan.