How To Get Out Of A Debt Trap

How to get out of a situation where you can't honour loan obligations such as paying your loan EMI. Here are 5 tips to get out of what is called as debt trap and take charge of your finances.

Hello and welcome to FundooMoney, your 24X7 buddy for all your money matters. 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. Shortly, we tell you the essential steps that you need to take in such a 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 do 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.

Look for low cost alternative
If you have high interest rate loan like a personal loan, you could take a lower cost loan, typically loans against assets such as gold, car or property to pay off the high cost debt.

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 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.

Liquidate investments if the need be 
If all of the above steps are not enough, consider liquidating some investments such as idle gold or property. Try to view this move without emotion. Consider the loan repayment burden a cost of retaining these investments with you. Once outstanding loans are repaid, you could use the money to invest for your future.

We hope you found this useful. Do share with us and others on the channel your tips for getting out of debt trap, by writing in the comments section. For more such actionable personal finance information and regular uploads, subscribe to our channel. Also, visit our website, download our mobile app and stay connected with us on Instagram, Pinterest and Slideshare.