Borrowing is a way of life for many. However, to avoid debt trap, borrowing should be done with caution and after assessing your finances. In case you fall into a debt trap, these tips can come handy.
You land in debt when your income is not enough to fulfill your needs. Debt helps you achieve your life goals. But when you fail to make timely repayments on old debts and continue taking new ones, your debt can spiral out of control. Therefore, besides having a plan for savings and investment, it is also important to have a debt plan. This can help you in managing your money better, help you get out of debt, and lead a healthy financial life.
If you are stuck in a debt trap, the first step to get out of it is acknowledging your debt problem. It is wise to assess your finances and make a list of the outstanding loans you have. This will help you prioritise repayments as per the interest rate on each loan.
Below is a five-point guide on how to get yourself out of a debt trap.
Get Rid Of The Expensive Loans First
When in a debt trap, it will be prudent to deal with loans that have the least benefits and the highest costs. Start with the ones with the highest interest rate. Unsecured loans like Credit Card dues add to your debts if not paid on time. However, loans taken for education or home purchase provide you tax benefits.
Restructuring May Help
If the size of your EMI is bothering you, considering approaching your lender. Ask them to restructure your debt by extending the repayment tenure. This would make your EMIs smaller. However, your total interest payout will go up.,
Get Rid Of Credit Card Debt
Plastic money is attractive because of the convenience it offers. However, credit card debt is also a loan that needs to be repaid in a timely manner. Responsible use of this unsecured form of debt is especially important because of the high interest rate and steep late payment penalties. If you have a credit card balance, you should look to repay it on priority. The annualized rate of interest of 30-40% is very high and your interest outgo on a credit card can balloon rapidly. You also have the option of transferring your card balance to a new credit card which has a lower interest rate. The lower interest rate also called the promotional interest rate is applicable only for a short time. Opt for credit card balance transfer only if the interest difference is high and you can pay off all the credit card dues within the promotional period.
Take Professional Help To Get Out Of Debt Trap
You can also seek the help of debt counseling agencies, which help people in debt through advisory services and also negotiate with creditors on your behalf. They help in two ways. One – by providing simple counseling service on how to get rid of debt. It takes into account your current financial position, the loans to be repaid, and the causes for falling in debt. The agency also offers repayment options and selects the best possible one while creating a budget and setting limits on your expenditure limits. Two – the agency also offers to negotiate with creditors on your behalf. These negotiations pertain to lower interest rates, waiving off late payment penalties and even loan restructuring. Agencies charge fees depending on your lending institution and the extent of your debt. There are many NGOs that provide debt counseling free of cost.
Take Help From Family Or Friends
Taking debt to clear your debt is a bad idea. But if you find yourself in such a problem, explore the option of seeking a ‘soft’ loan from your family or friends. These loans may have little or no interest and may have a flexible repayment schedule as well. You can use them to clear existing debt.
Although there are debt management mechanism in place, it is best to be smart and honest while dealing with your debts to have a peaceful financial life.