Personal Finance

Signs that show you are nearing a debt trap and how to overcome it

Updated : July 04, 2020 02:17 PM IST

However, borrowing irresponsibly can shatter the financial aspirations and hence, one should be cautious enough to avoid it.

These days debt has become unavoidable for most people. However, borrowing irresponsibly can shatter the financial aspirations and hence, one should be cautious enough to avoid it. While there is no definite formula for calculating the debt trap, there are some warning signs that borrowers must be watchful of.

According to Charlie Lee, chief executive officer and co-founder, True Balance, one of the classic signs that a person is falling into a debt trap is that they start defaulting on payments for more than a quarter.

"Another is that they start paying off EMIs with credit cards, where earlier they were using a debit or cash-based repayment instruments," he added.

Some people even fail to take corrective measures to improve situation and then, the never-ending cycle of debt begins. For example, most people who are getting debt-ridden are stuck in the revolving debt cycle. They often take one loan to pay off another.

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"The revolving debt can give instant relief by taking care of immediate needs to pay-off an old debt, but it perpetuates the cycle, by adding interest cost to it. In the meantime, borrowers may end up taking new loans for meeting other requirements, adding up to the financial woes," explains Anuj Kacker, co-founder MoneyTap.

Here are some other signs that show one is heading towards debt trap, according to Pranjal Kamra, CEO, Finology:

Having too many lines of credit or high EMI/income ratio.
Rolling over credit card bills.
Withdrawing cash through credit card.
Incapability to save any money.
Regular expenses are funded through debt.
Bank starts rejecting the loan application.
Taking loans in order to repay loans.
Paying a large part of salary as EMI.

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Here’s how one should avoid falling into a debt trap:

Reviewing Budget

According to Kamra, one must list down the monthly income and expenses.

"Analyse the necessities and discretionary expenditure, and try to filter the expenses which can be eliminated such as entertainment, shopping bills or hotel bills can be reconsidered,” he explains.

Liability Management

Borrowers should make a note of all liabilities and create a plan for repayment. First, consider paying loans with higher interest costs like credit card payments or personal loans. If borrowers are facing difficulties in loan repayment, they should go for a restructuring plan.

"Taking loan for creating an asset like house, or for a vehicle that is important for commuting to work should be preferred over buying lifestyle things like costly mobile phones etc," suggests Prashant A Bhonsle, CEO, Education and CMO, InCred.

Automate EMI Payments

Make debt repayment the top priority by opting for an auto-debit option. Also, try paying the outstanding amount on a credit card by the due date, and avoid rolling over the bill amount to the next billing cycle.

Signs that show you are nearing a debt trap and how to overcome it

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