A debt trap is a financial situation in which you cannot make EMI or credit card payments on time, resulting in an increase in outstanding debt. Other than that, you will be classified as indebted if you run out of money for additional savings and investment purposes. You can get into this situation if you have taken out too many loans and cannot pay them back, or if you use one form of debt to pay another. What should you do now to get out of debt? Keep reading.
The first step is to understand the extent of your debt. Make a list of all your debts, along with their interest rates and the amount of the outstanding loan. This will tell you which loans are the most stressful for your wallet. Then write down your essential expenses, such as your daily household expenses and insurance premiums, and calculate the total amount available to pay the loan.
Most people make the mistake of not applying for discounted loans from friends or family. However, you must be the first to contact them. These loans do not have or have very low-interest costs and, therefore, they are very practical to pay other debts.
Unsecured loans, such as credit cards owed or personal loans, have interest rates of up to 45% and 25%, respectively. On the other hand, a home loan or educational loan offers the benefit of tax deductions, which reduces the cost of credit. Your strategy should be to get rid of your expensive loans first while keeping track of the advantageous loans. However, continue to make the minimum payment on all loans, otherwise, you will be penalized, worsening your debt burden.
Pay off your high-interest loans using new loans at low-interest rates. For example, if you have a credit card fee with an interest rate of 40% to 45%, pay with a personal loan. In this way, you can save yourself some very interesting trips. You can also choose other cheaper options, such as securities loans, gold, term deposits, or insurance policies.
Use your low-yield investments to pay off your loans at higher interest rates. If you have a fixed deposit with an annual return of 9% and a personal loan of 18%, it is more sensible to pay it off to pay off your loan.
You can also contact your lender to restructure your loan by extending the term. As this reduces your EMI, your net interest payment increases. If this is not possible and you no longer have a choice, you may consider paying off the loan with the lender. However, I don’t recommend it as credit processing has a big impact on your creditworthiness and prevents you from getting approved for a future loan.