No one wants to find themselves in a debt trap. When one is in a debt trap, one is forced to keep borrowing to repay existing loans. It is a delicate financial situation that can lead to bankruptcy. In this article, we will help you understand what a debt trap is and how to avoid falling into it.
What is a Debt Trap?
Technically, a debt trap is a situation where you are forced to borrow fresh loans to repay your existing loan obligations. In this case, an individual ends up accumulating huge amounts of money to individuals and institutions to the extent that they are forced to apply for fresh loans. You end up borrowing from one party to repay debts owed to another party. The more debt you have, the more loans you accumulate. It is a vicious circle. The subsequent loans are usually more expensive, which leads to more debt. The debt trap.
While it is sometimes wise to apply for a loan, you need to evaluate if it is really important and what would be the future implication. However, if you find yourself in a debt trap, here’s what you need to do to avoid falling into it.
Some of the things that can lead to a debt trap include signing up for multiple subscription plans, taking auto loans, using savings to pay off debts, failure to have an emergency fund and failure to plan your finances.
How to Avoid Falling in a Debt Trap
In this article, we will discuss some of the ways you can avoid falling into a debt trap.
Identify the Problem and Create a Plan
One of the things that you need to do is to come up with a plan on how you can repay your debts. Identifying a problem will help you find its remedies. For instance, if you are borrowing to buy a car, determine if it is worth it. You need to identify where most of your money goes and see how you can address the issue.
Choose Your Priorities
You need to do an analysis and understand what your priorities are. Then separate needs from luxuries. Make a plan to spend on the needs only. The idea here is to spend only on the important things only. You can also avoid going for luxurious stuff and look for cheaper alternatives. This will help you lower your expenses and avoid falling into further debt. Alternatively, you can look for things that take a significant part of your money and get rid of them. For instance, if you spend a lot on your car, you can sell it and start using public transport and pay off your debts.
Make Changes to Lifestyle
To lower your expenses and thirst for more debts, you need to make some behavioral changes. For instance, you may need to get rid of some activities that consume your money. For instance, if you are used to going out for trips, then you may consider getting rid of some of your unnecessary trips. You can calculate the extra amount you will save by making such behavioral changes and then directing the money you would have otherwise spent into repaying your loans.
Build an Emergency Fund
You need to have an emergency fund so that you do not resort to debts whenever you are in an emergency. This is an important kitty that will help you evade debts. With an emergency fund, you can easily bail yourself out of the situation. If you create a habit of setting aside some cash for emergencies, it will help you to stop relying on borrowing. This way, you will avoid falling into a debt trap.
Start Debt Consolidation
If you have multiple loans from different institutions, then there is a possibility that you are servicing them at different interest rates. Debt consolidation is where you consolidate all your debts into a single loan. Debt consolidation can bail you out of debts quickly. There are many firms out there that offer debt consolidation that you can consider using. Consolidating your personal loans into a single monthly payment plan will allow you to pay them off in good time. It will also help you plan your monthly expenses and prevent you from falling into a further debt trap.
Student Loan Forgiveness
There are student loan forgiveness plans to help borrowers who are struggling to repay their loans without affecting their family/personal income and end up resorting to loans. You can look for loan forgiveness programs so that you can meet the cost of living without falling into a debt trap.
Final Word on How to Avoid Debt Trap
Although debts are good and sometimes help one get solve their financial problems, they can be harmful if not well handled. Borrowing too much can make you fall into a debt trap and it may be difficult to get out of it. As such, it is easier to avoid falling into a debt trap than getting out of one. Consider the tips above to help you not fall into a debt trap.