Typically, the concept of debt is used when a person needs to buy items, objects, goods, or for studying: spending which are essential and for which they may not be able to put the entire amount at one go.
A debt arises every time a person borrows from any institution or other people, promising to pay back the sum along with an agreed interest within a particular period of time. Typically, the concept of debt is used when a person needs to buy items, objects, goods, or for studying: spending which are essential and for which they may not be able to put the entire amount at one go. Debt is commonly known as loan and typically, the paying back of the debt/loan happens on a monthly basis, for a fixed number of months. A debt trap is a scenario when a person is unable to pay back the monthly dues because he or she has taken too many loans. When the loan payment along with the monthly expenses exceed the monthly income, a person is slowly but surely pulled into a debt trap.
So how does one avoid getting completely sucked into a debt trap?
The person, on the verge or slightly into a debt trap, should first sit and take note of all the debts that they have. They should make a comprehensive list of all the loans/ debt amounts, the rate of interests, and the period of each and every single debt/ loan taken. They should then make a list of all the unavoidable monthly expenses. Then they should start channelising every single paisa over and above the essential monthly expense towards paying back the debt. Coming up with a strategy which will reflect the cash flow will help in understanding the time, money, and efforts required paying back all the debt and becoming debt free.
The person can begin by looking into their savings to see if a loan can be taken against their fixed deposits, bonds, insurance, and PPF. This amount can be used to close out all the external debt. The person can then evolve a strategy to pay back the loan secured against their savings and ensure that their principle has not got eroded.
Furthermore, they can also see if they can take a bigger loan at as low an interest possible to pay off a combination of loans and close them. This is so that they can return to just one borrower and not be indebted to many! It will also help in making the process of going debt free, a hassle free one.
Some points to keep in mind:
A person in the debt trap must always finish paying back the loan with a high interest rate, even if the loan amount seems small. The interest will keep piling up and make the principle much larger than the original amount, if it is not paid off.
A very important thing which the person must keep in mind and pay heed to, is that they do not borrow anymore and add to the existing debt.
Never borrow for a luxury but for a need: this should be the fundamental principle for any kind of borrowing!
Never take loans up to the maximum limit which is permissible for your income. It is skating on thin ice and bound to break, more often than not!
Do not ever take the pre-approved offers which crop up. They come with high hidden costs.
Keep that credit card inside till you go debt free!
Always and always read the fine print before you borrow from any source.
Do not borrow from non-institutional sources such as local money lenders. The rates will be high and there are not many ways in which a borrower can be protected by the law. The rates will be exorbitant as soon as the person defaults and they will quickly find themselves in a debt trap.
It is always better to err in the side of caution when it comes to borrowing and debt. Use the strategies mentioned above to go debt free, and never fall into the trap again!
The author is Founder and CEO, Right Horizons