How to Get Out of a Debt Trap

Introduction

In simple words, a debt trap is a situation where you find it practically impossible to repay your existing loans, credit card bills, etc. That can be due to extremely high-interest rates or a financial crunch that forces you to take on a lot of debt. Poor financial planning is also a common cause for falling into a debt trap.

Regardless of the reason, being knee-deep in debt can be baffling and negatively impact your credit score. Here are some ways to get out of such a situation.

1. Consolidate your debt:

Debt consolidation refers to shifting all of your loans under one single loan. In this strategy, you combine your ongoing loans under a new personal loan. A single rate of interest is charged on the consolidated amount that makes it easier to clear the loan. This strategy simplifies the debt repayment process and offers benefits like lower interest rates and EMIs (equated monthly instalments) and longer repayment terms.

2. Prioritize some loans over others:

If you have any loans with collateral, you should try to pay them off at the earliest. Failure to pay debt with collateral puts you at the risk of losing your assets. After you pay off your collateral loans, the second line can be debt like education or home loan. These loans offer tax savings, so you can draw some benefits from them and save money that can ultimately help you get out of the debt trap.

3. Liquidate your investments:

If you have investments like mutual funds, stocks, bonds, etc., consider liquidating them. You can use this money to prepay your loan. While this may hinder your long-term goals, you will be able to get rid of your existing debt. You can also sell assets like gold, real estate, etc., to generate some funds. However, make sure that you understand the tax liability of liquidating your investments and assets, and make a decision after weighing in all the pros and cons.

4. Make a budget:

Small shifts like creating a budget and diligently sticking to it can help with debt repayment too. Living frugally till all your loans have been settled can be a simple yet excellent way to solve the problem. You can adopt measures like cancelling unnecessary subscriptions, using public transport to save on fuel, eating at home versus dining out, no impulse shopping, etc.

5. Avoid more debt:

A lot of people fall into the cycle of never-ending debt. Overdependence on your credit card, easy accessibility to personal loans, etc., can give you a false sense of financial freedom. However, if you are already stuck in a pool of debt, you must aim at avoiding any new debt. First, try to pay off your existing loans and then consider borrowing more.

6. Earn more money:

You can find ways to increase your income by taking on freelance work, volunteering extra hours at your office, looking for a new job, asking your employer for an increment, etc. The additional money that you earn can be contributed towards debt repayment.

To sum it up

Sound financial planning can help you prioritize your expenses and never get in a situation where you find it hard to repay your