How to know if you’re falling into a debt trap?

In today’s world, debts are unavoidable. Loan or credit facilities assist you to buy things you need and enable you to pay as you earn. As good as it sounds, this anticipated help becomes a big trouble when handled irresponsibly. It has even become the cause of businesses or individuals going bankrupt or falling into the never ending debt cycle.

Are you heading towards a debt trap?

An overdue credit card payment, a missed EMI, a sudden need to take a personal loan to pay off another loan are often the first signs of falling into a debt trap that most of us ignore thinking “Oh, I’ll handle it as I will have money soon”. Unfortunately, its these debts and their missed payments that become a problem later.

So here are the 5 things that you need to keep a tap on to ensure you’re not falling into the debt trap before it’s too late-:

Easy EMI may not be so easy after all

It does seem tempting to buy products on 0% EMI. It also seems fine to pay Rs. 2,000-5,000 a month spread over 6-12 months instead of a lump sum amount immediately. Now if we add 3-4 such ‘easy’ EMIs in a month; does it look easy anymore?

According to a survey by ET Wealth, 15% of the respondents, had an EMI outgo of more than 50%. If your EMIs are eating up 40-50% of your salary, right there is your warning sign.

Personal Loans

So many of us end up taking a personal loan to cover for big expenditures like taking exotic vacations, funding education abroad, big fat weddings etc; expenses that could have been paid for through our savings too. While it’s easy to get a personal loan when we need if we have a recurring income; but what we ignore is the high interest rate on personal loans that eats away our recurring income later.

Keep personal loan as last choice and only if there’s an actual emergency that you cannot handle otherwise.  

Loan to clear a loan

It might seem luring to get a loan to pay off a previous loan; an option that a lot of banks offer. But what people forget it that you will have to pay off that loan someday. So if you’re doing so just to buy some more time to pay off the loan; you’re entering into a clear debt trap and that too a cyclic one.

If you want to pay off a loan, use you low return investments to pay off rather get it refinanced often.

Misusing Credit Cards

Credit card is the worst form of debt because when you’re assuming the debt, you don’t even realise you have assumed it. On swiping a credit card the amount does not gets debited immediately and hence we don’t realise until the end of the month how much we’ve spent/ overspent.

Remember with credit cards, the amount to be paid gets delayed but you still have to pay it. So use it wisely. If you get shocked at the month end to see your credit card expenses; it’s time for you to say goodbye to your credit cards. 

Unpaid credit card bills

While having a credit card in the first place can create problems, non-payment of credit card bills can worsen the situation. Delay in the credit card payments beyond the due date attracts interest which is as high as 24%-36%.

Not just this, it brings down your CIBIL score making it more difficult to get loans in future for more legitimate things like house or car or emergencies. And paying minimum amount due doesn’t help in the long run because the interest cycle does not stop.

Thus, don’t miss your credit card payments no matter what it is.

When borrowing money, it is important to know how you will return it. Debt-taking plan should also include the debt-returning plan that is logical and doable. Look out for early signs from above and set a fixed date to close all debts and make your best effort to stick to it. Debts are meant to help and should be kept that way. Don’t let it become a noose around your neck.

Author:

SLA Financial Solutions is a Leading Advisory firm based out of Jaipur. We are amongst the top 5 Financial Advisory firm with a team of 20 + people. We have been awarded twice by CNBC as best Financial Advisor across North India.

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