5 Steps To Get Out Of A Debt Trap

  Author: Naveen Kumar

We have all heard about the word “debt trap”. But what exactly is it?  Well, debt trap is situation where you have taken so much debt or loans that you find yourself unable to even service the monthly interest. You actually need a loan to pay the interest and hence end up increasing your debt. This is a vicious cycle created in the first place due to excessive and high interest rate borrowing.

You need to create and work on a plan diligently to get away from this financial mess. Here are five steps you need to take in any such plan.

Pay off high cost debt at the earliest Prioritise all your debts based on interest rates. Get rid of highest cost debt such as those of credit card outstanding that typically charge 40% annually. If the outstanding amount is too large, take a personal loan or opt for a balance transfer on EMI on other credit card. This could bring the interest rate to a more manageable level of around 12-15%.

Consolidate medium cost debt If you have many small value loans like consumer loans, personal loan or credit card dues, it would be better for you to bring all these loans at one place by taking a personal loan or debt consolidation loan at a low interest rate. You can interact with your lending institution for this.

Try extending the tenure If you are likely to find it difficult even to pay off low cost EMIs, consider extending the tenure of the loan to manage the repayment obligation. Secured loans should typically allow you to have a long tenure. This will also keep the EMI under check. Once your income rises or you get any windfall gains, you can utilise that amount for faster repayment of your loan.

A debt trap is a bad thing to be in as if not tackled properly and matters only get worse pushing your life into further financial mess. But worry not, a proper plan and financial discipline can take you out of a debt trap and get your finances back on track.