Many people also avail a personal loan to repay their existing credit card loan, which solves the problem for the time being, but experts suggest it is not a good idea for the long run.
Most of us do not see it coming when it begins, but it generally starts with an overdue on a credit card or a missed EMI which eventually leads one into a debt trap over time. Many people also avail a personal loan to repay their existing credit card loan, which solves the problem for the time being, but experts suggest it is not a good idea for the long run.
Consequently, one should try to monitor his/her monthly expenditures and income sources, and also try to maintain a balance between both. A debt trap is when various types of dues are combined together. For instance personal loans, credit card debt, car loans, borrowing from family and friends and defaulting on almost all payments at the same time.
These are the things you need to look out for if you think you are heading towards a debt trap:
EMI crossing certain part of your income
With a rise in their income, most people tend to overspend and get themselves landed in debts. Experts suggest rise in income does not mean that one should increase one’s debt as well. Try to keep your spending habits in control especially if you have an ongoing EMI. The total EMI payments and loan repayments should ideally be kept at below 30 per cent of the borrower’s income. The benchmark can be exceeded by a maximum of 5 per cent but not beyond, only if you don’t have too many financial responsibilities.
Debt repayment amount from your monthly income
If you are paying more than 40-45 per cent of your monthly income as, debt repayment, it is a sign that you are heading towards a debt trap. Experts say a large portion of a borrower’s monthly income if is going towards servicing EMIs, they should immediately take control of the situation or else there are chances that they will fall into a debt trap.
Default in servicing debt
Converting credit card payments into EMIs have now become a common thing after paying bills and making online transactions using the credit card. Most people don’t understand that if the necessary obligations and repayments are not made on time, the situation can get worse. Industry experts say, what people don’t get is these type of spending behavior is an early sign of an impending debt trap. Know that you are heading for a debt trap if your debts are increasing every month and you are struggling and you end up paying just the interest and the minimal amount.
Loan to repay existing debt
This method may lead to a serious debt trap. Have you taken a loan just to repay another loan? That is not the way out because the chain continues. If you are not being able to pay back your existing loans and further talking a loan just to pay back your existing loans, you are definitely heading into the debt trap. Instead, to stay clear of such situations, try to pay back your dues with any savings that you have or bonuses that you receive. Once you clear off your dues, you can start saving again.