What is a Debt Trap? 5 ways to avoid falling into it

A debt trap can be a financial hole difficult to come out of. Know more about what a debt trap is and how you can avoid it

When your income is insufficient to meet your demands, you go into debt. In such situations, loans can be of assistance. However, if you do not pay off previous debts on time and keep taking on additional ones, your debt can quickly spiral out of hand. Therefore, besides having a savings and investment strategy, having a debt strategy is critical. It can help you manage your money, overcome debt, and live a financially healthy life. Having a debt strategy is also essential to keep yourself from getting stuck in a debt trap.

To avoid falling into a debt trap, first, you need to understand what a debt trap is. 

What is a debt trap?

A debt trap, in technical terms, is a situation in which the debt you owe grows out of bounds. When you consume more than you make, you wind up in this scenario. Unforeseen occurrences, a decision to seek higher education or a lack of preparedness, can lead to debt that takes years to repay. But there are ways in which you can avoid falling into a debt trap. There are also ways in which you can get out of a debt trap if you have fallen into it. The key is being vigilant and pulling yourself up.

Ways to avoid falling into a debt trap

Here are a few ways to avoid getting into a debt trap:

Examine your finances

Analyse your current position and discover the areas that are causing you concern. Make a plan to deal with the things you can manage. A thorough examination of your existing stand could be the key to resolving your debt issues.

Control your emotions

Divide your spending into three categories: Necessities, semi-necessary expenses, and unnecessary expenses. To minimise semi/unnecessary expenditures, make behavioural or attitude modifications.

Consolidate your debt

Debt consolidation enables you to settle many loans with a single payment. Once you have consolidated your debt, you will only have to worry about repaying one loan rather than multiple loans with varied interest rates and due dates. Choose a good bank to consolidate your loans. At IDFC FIRST Bank, you can get instant personal loans, with personal loan interest rates that will allow your EMIs to be easier to pay off. All you need to do is apply for a personal loan online via our banking app, and you can have the amount in your account within 48 hours post-verification. 

Redeem your investments

If you have high-return investments such as mutual funds, bank deposits, and equities, you can use them to pay off your debt. You can focus on rebuilding your wealth once you have paid off a significant amount of debt.

Create an emergency fund

It is critical to keep a separate fund dedicated solely to dealing with financial emergencies. An emergency fund should ideally be at least 3 to 6 months' worth of living expenditures. This fund can assist you in getting through difficult times without having to take out a loan. You can put this money in a variety of high liquidity investing products and savings accounts.

How to get out of a debt trap if you have fallen into one?

You can tell the difference between a healthy and a poor debt. Debts are divided into two categories: revenue-generating and non-revenue-generating. Debts used to purchase an asset can help you generate revenue or provide a better living for a substantial period. As a result, these are referred to as good debts. Bad debt occurs when a loan is taken out against an asset and does not generate any revenue. There are techniques to analyze and help with your problem. Try eliminating bad debts as far as possible and learn to maintain your good debts in a healthy way. 

Healthy financial management can go a long way towards avoiding debt and reaching financial independence. So, if you are taking out a loan or credit card to buy something or meet a pressing financial objective, ensure you pay it back on time to avoid exorbitant interest rates or debt traps. Applying for instant personal loan online and availing them is an easy process, thanks to mobile bank apps. Begin today!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.