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As a result of the tremendous growth in the banking and finance sector, availing a loan has become far more convenient. Nowadays, apart from traditional banks, loans can also be availed through NBFCs and other online lenders. The popularity of loans amongst common people has increased significantly owing toits easy application process and the freedom to customize it as per the requirement. Nowadays, a large number of people depend on loans to finance big purchases, manage their wedding expenses, plan an international holiday, etc. Though availing loans can be extremely helpful, depending on them too often can take a toll on your finances in the long run.
Relying excessively on loans can also lead to a debt trap. A debt trap occurs when a borrower fails to make payments on the loan principal, instead, they can only manage to make payments on the interest. Since making payments on the interest does not lead to a reduction in the principal,the borrower never gets any closer to paying off the loan itself. Therefore, in order to keep the financial security intact, it is essential to avoid a debt trap.
Below are some of the situations that can lead to a debt trap:
Using credit cards to withdraw money
In case ofshortage of funds, using a credit card is an easy option available to you. However, the high-interest rate of a credit card may lead you to a debt trap. Therefore, it is essential that you improve your spending habits and use your credit card wisely. Managing your finances wisely can help you prevent the vicious cycle of a debt trap.
Your EMIs exceed 50% of your income
Availing too many loans for different purposes can increase the cost of your EMIs considerably. If your EMIs exceed 50% of your monthly income, it is a clear indication of a debt trap. Also, such high EMIs reduce your chances of getting a loan in times of emergency as it indicates that you might not be capable of repayment.
Missing bill payments and EMIs
Due to financial instability, you might find it difficult to pay your bills and EMIs. This too is an indication that you are not managing your finances well and if not improved, a debt trap may arise. Hence, try to be timely with all your monthly payments to avoid a situation that can lead to a debt trap.
Availing a loan to repay another loan
Before availing a loan, it is important that you analyse your repaying capacity. Because if you fail to make timely repayment of the EMIs, you might have to bear the penalties associated with it. Also, to avoid this scenario, you might consider availing another loan to repay the existing loan. If this happens, it is an indication that you are already into a debt trap. Therefore, it is essential that you borrow wisely according to your needs and repayment capacity.
Now that you are aware of the common signs of a debt trap, make sure that you take all the required measures to avoid it by managing your finances wisely.
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