Whether you have an urgent expense to make or you wish to purchase a dream house, loans are important financial tools that you can rely on. Simple eligibility conditions, minimal documentation requirements, easy application, and fast approval processes have made loans much more accessible than ever before. However, sometimes, borrowers can get trapped in a vicious circle of debts owing to this ease of availability and access. This is called a debt trap.
A debt trap is an intense issue that borrowers often don’t recognize until they are neck-deep in it. Here are some tell-tale signs that can help recognize if you are headed into a debt trap so that you can work in time and find a suitable turnaround.
You Have Taken Too Many Loans
If you are under too many loans and you pay several EMIs on different dates of the month, it can be exhausting for you and you run the risk of defaulting. You may also be losing a lot of money on paying interest on your loans. If you are in this situation, it’s a sign of getting into a debt trap.
Your Monthly Expenses Exceed 70% of Your Income
EMIs are not the only obligations you have to meet. You have to take care of other expenses as well, including rent, utility bills, school fees, etc. Ideally, your monthly expenses should be around 50% of your earnings. But if they are exceeding 70%, you might be slowly getting into a debt trap.
Your EMIs Consume More Than 50% of Your Earnings
With the easy availability of finance these days, people tend to over-spend compulsively. By easily falling prey to sales and discounts, they usually end up purchasing things on loans. Although the EMIs seem to be too little in the beginning, they add up to a make significant amount that you have to repay every month. As a result, you are left with very little money to meet your other expenses.
If the total EMIs you pay every month consume more than 50% of your total earnings, take it as a red flag to indicate that you are getting into a debt trap.
You Have No Money Left for Savings
After all the monthly earnings and expenses, if you cannot save anything, it might be because of other expenses and due to excessive debt. Take it as another sign that you are getting into a debt trap.
You are Missing Your EMIs
If you are in a financial crunch, you may be forced to skip some of your EMIs. It’s not a good sign, as every missed payment makes a dent in your credit history and affects your credit score. Besides that, the lender will also charge you will late payment charges and other penalties.
Once you miss a payment, the extra money you have to pay for affects your budget and forces you to borrow again. This is a strong indication that you are not able to manage your finances properly.
You are Taking Loans to Meet Your Everyday Expenses
Ideally, EMIs should be a portion of your income that you can pay after meeting all your other household expenses. But if you are meeting your everyday expenses with your loan amount, then you may already be in a debt trap.
You Have Started Borrowing from Friends and Relatives to Repay Your EMIs
When you apply for a loan, you must recognize your repayment capacity first. Avoid borrowing more than your repayment limit. Otherwise, it will be hard to repay it later. Once you start defaulting on EMI repayments, you have to pay missed EMIs along with penalties. If it continues for some time, a situation arises where you are left with no other option but to borrow money from friends and relatives to repay your EMIs.
If you are facing or are about to face such a situation, you are probably in a debt trap. To avoid this, use a loan EMI calculator, know your EMI amount, and borrow wisely as per your requirements and repayment limit.
You Have Exceeded Your Credit Card Limit
Credit cards have made life easy for everyone. Just swipe your card and purchase whatever comes within your credit limit. You can bring your bought items home and pay for them later. However, if you have exceeded your credit card limit, take some time to think about where you stand financially. You might find yourself in a debt trap.
Tips to Getting Rid of Debt Trap
If you find yourself in a debt trap or moving towards it, here are a few tips that can help you turn it around.
Acknowledge and Accept: First of all, acknowledge and accept that you are in a debt problem. Identify the cause of your debt trap and create a plan to address it.
Prioritize: Create a list of your needs financially and refrain from any semi-essential and non-essential items until you are back on track. Your priority should be to pay off your loans and then meet other expenses.
Consolidate Debts: If you are paying several loan EMIs in a month, consolidate them with a personal loan for debt consolidation. After this, you have to concentrate on paying only one EMI without any delayed or missed payments.
Automate Payments: Automating the payments ensure that you never miss your payments so that you can get rid of your debt faster and save on late fees and penalties.
Avoid Taking More Loans: Ideally, your EMIs should not consume more than 30-40% of your monthly income. If you have already reached that limit, avoid taking any more loans.
Increase Income: Find ways to increase your income so that you can manage your finances in a better way. Pick up a freelance job, part-time job, or work from home relevant to your experience, knowledge, and skills.
Keep a Check on Your Credit Score: A good credit score of more than 725 is an indication of a responsible borrower. A high score will attract more lenders, best interest rates, and lucrative loan terms. Check your credit score frequently to know where you stand.
If you find yourself in a debt trap, a personal loan from Clix Capital can be the right solution to consolidate your debts and repay them easily. Apply for a personal loan now.
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