What is the debt trap and why should you be careful
Debt is something that most of us will experience over the course of our lives, whether that is after buying a house, setting up a business, or finishing further education, there is a certain inevitability around the concept. Although easily controllable initially, debt can easily begin to mount up from different avenues and spiral leaving you in what we call the debt trap. However, it isn’t impossible to work your way out of such a difficult situation through smart planning and financing but it must be said, it is considerably easier to slip further in than it is to climb out. Here I will present you with 10 possible footholds to help contribute to getting clear of the debt trap.
1. Address and evaluate your debt
It is easy to turn a blind eye to mounting debt as in the immediate future it may not affect you. However, the short term benefit leads to significant long term pain. A proactive way to deal with such a situation would be to thoroughly lay out the extent of your issues, however bad. From here you can start to build a more tailored plan as to how to deal with it. Look at the further instalments required and differentiate between the low and high interest outstanding bills.
2. Create a household budget
By creating a household budget, you can better focus on the influxes and leakages from your personal finances. Repaying debt will always be a tough task and sacrifices will have to be made. Hence by tracking your finances, you can figure out where to cut personal expenditure to allocate the money required towards debt repayment.
3. Prioritization of debt repayment
It is important to note any penalties you could be liable for with regard to your debt repayment. To ensure that this doesn’t affect you, prioritize paying the minimum on any outstanding loans you have to guarantee you will not be accountable to pay these extra remittances. From here, focus on high interest loans such as credit cards and payday loans as these can easily push you into the debt trap if left unaccounted for.
4. Negotiate interest rates
If possible, talk to your loan provider and discuss the possibility of reducing the interest amount by highlighting your situation and expressing your commitment towards repaying the debt. This however is a long shot though worth trying.
5. Refinance and Consolidate debt
Debt consolidation can be a useful tool when trying to avoid the debt trap. By using low interest loans (such as loans against LIC) or transferring balance to a credit card with a lower rate, you can begin to refinance your debt. However, plan this very carefully to ensure that your total cost is less than what you initially started with and you are paying less.
6. Avoid new debt
Although this may sound obvious, many people do not notice the imminence of the debt until its too late and still continue taking out small loans and credit cards for purchases and other expenditures. Try to focus on living within your means at least until you can get a grasp of the debt that you already are in.
7. Generate additional income
A part time job, some freelance work or even selling some old items that you may no longer use could go a long way towards escaping the debt trap. It can allow you to put more money towards debt repayment and to live more comfortably whilst doing so.
8. Seek professional advice
Sitting down with a financial advisor or credit counselor can you give you some personalised direction on how to approach your debt. It is helpful to get an expert’s opinion on how you can come out of this with a healthy bank account and finances.
9. Educate yourself
Even if you don’t speak to a specialist, being knowledgeable about the specifics of what you are involved in could help you to better address your issue. A comprehensive understanding of simple financial concepts can help you make more informed and sensible decisions when it comes to servicing your debt as you can better understand the terms of your loans, such as their interest rates, frequency of payments, penalties etc.
10. Stay committed
Like anything in life, real change only comes down to consistency over a sustained period of time, and this is no different. Stay committed to your plan to refinance, budget, or repay your debt and give yourself the best possible chance to escape the debt trap.
Remember, there is no one-size-fits-all solution, and the effectiveness of these strategies may vary depending on individual circumstances. It's crucial to tailor your approach to your specific financial situation and seek professional advice when needed. Talk to one of our Mera Kal Saathis today to get the advice you need!