How to Escape a Debt Trap

How to Escape a Debt Trap

A debt trap is a position wherein a person is under debt and needs to divert a substantial portion of their income in servicing their debts, leaving them with no savings and a low standard of living. While no one wants to live under debt, life often forces us to take on debt, maybe due to emergencies or perhaps bad spending habits combined with easy access to loans and borrowed funds.

Nonetheless, a debt trap does not need to be permanent, and there are a few ways of escaping a situation of a debt trap:

Analyze the Nature of your Debt

Every form of debt has a different cost of capital, while certain debts such as home loans and other forms of secured might attract a low rate of interest, unsecured loans such as personal and business loans, credit card debts attract a high rate of interest.

It is wise to raise low-cost loans to pay off high interest-bearing loans. This reduces the overall monthly debt repayment obligation and interest payments, this helps you to escape a debt trap.

Reduce Your Expenses

The best way to escape a debt trap is to pay off your debts as fast as possible. While it might not be possible to pay off your entire debts at a single go, you can reduce your expenses, increase your savings, and divert these savings of foreclosing a small portion of your debt. You can also use a significant part of your annual performance bonuses, Diwali bonus, leave encashment, etc. towards foreclosing a small portion of your loan. This will help you reduce your debt obligation faster and slowly and steadily escape the debt trap.

Find ways to Increase your Income

While most of us rely on your monthly salaries as our sole source of income, there are other ways to increase your income from another source. You can use your other skills and talents to earn a freelance income on the side, after working hours and weekends. This new income can use their additional income to pay off their debts and gradually escape a debt trap.

 

 Image Credit: gulfnews.com

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