Feb 26, 2022 ●15 min read
Everything You Need to Know About Debt Traps and 6 Ways to Avoid Them
If you have been consistently researching about lending instruments for some time now, one term which you have definitely come across is debt trap.
However, although most of us are unaware of its exact meaning, due to the rise in financial awareness, it is now common knowledge that everyone should avoid falling into a debt trap at all costs.
Thus, in today’s article, we will take a deeper look into the exact meaning of this terminology and additionally share with you time tested strategies at how you can avoid falling into one.
Without further ado, let’s get started.
One of the first and most important aspects we need to understand is the exact meaning of the terminology debt trap.
In layman terms, a debt trap can be defined as a scenario wherein the borrower is under a lot of financial strain due to the non-payment of his or her repayment obligations. For instance, if you have taken an instant personal loan and due to an unfortunate situation you are suddenly unable to continue your repayment, then this will increase your overall debt, and this entire situation is referred to as a debt trap.
Another interpretation of the term debt trap can be found in a situation wherein the borrower actively subscribes to too many lending instruments at the same time, thus rendering them incapable of paying either of them on time.
In either of the above scenarios, the borrower will be under a tremendous amount of financial strain along with suffering from other consequences such as reduction in CIBIL score, reduced creditworthiness and thus an inability to borrow in the long term.
Now that you are well aware of what is a debt trap along with some of the most significant consequences of the same, shared below are a 6 time tested strategies you can leverage to avoid falling prey to one.
One of the first and ideally the best strategy you can leverage to stay out of a debt trap is to gather all your finances and intently analyze them such that you can effortlessly identify the root cause behind the charade.
For instance, you can effortlessly identify that you have fallen prey to a debt trap because you have been excessively relying on your credit card to fund your shopping sprees. Analyzing the situation at hand and subsequently identifying the root cause will not only help you expertly understand the problem but also strategies a way out of it.
Oftentimes when we are leading life on a line of credit, we tend to lose our way and priorities our luxuries before our essential needs and wants. While initially, this might offer us great materialistic pleasure, in reality, this is undoubtedly one of the best ways to fall into a debt trap. Thus, as a rule of thumb, if you want to avoid falling into a debt trap, ensure that you only splurge a restricted amount of funds, especially when you are doing so on credit.
Following this methodology and discipline will not only ensure that you have enough funds at your disposal for your needs and wants but also that you don’t land yourself in a debt trap.
While it is not well known to many, one of the best ways to effectively come out of a debt trap is to make use of a technique called debt consolidation.
In simple terms, debt consolidation is a strategy wherein you take one large ticket loan to pay back all your individual dues such that in the end, you are only left with one EMI to pay every month. Although debt consolidation has been around for quite some time now, most borrowers are unaware of it, due to the scarcity of lenders who render this service.
However, if you have the appropriate expertise to locate a debt consolidation company which meets your requirements, you can leverage their services to expertly come out of your debt trap.
One common ideology which every investor follows is investing their hard earned money for future emergencies and rainy days, and falling into a debt trap, whether intentionally or not, qualifies as an emergency situation. Thus as a fail safe option, if you have enough investments available, now is the time to redeem them and use the available funds to steer clear of the impending debt trap.
While this might be readily evident, it is worth repeating that you should stop relying on credit instruments until you have repaid your existing debts in full. This determination will not only help you develop a greater sense of responsibility and discipline but also ensure that you do not take on more debt while you are in the midst of clearing your past ones.
Last but not least, there is no guarantee that such a situation will not repeat itself in the future, and thus you need to build an emergency fund from now on such that in the near future, whenever such an emergency presents itself, you have the adequate arsenal to protect yourself from a financial crisis.
These days there are various liquid savings instruments available in the market, and you can conveniently make use of these to park a portion of your earnings every month to be used on a rainy day.
With the consistent rise in personal loan app such as ZinCash, the possibility of end consumers falling into a debt trap has also unfortunately risen, thus making it crucial that you are aware of the concept behind debt traps and how to avoid them, upfront. Thus keep the above information handy and effortlessly steer away from a debt trap.