How to avoid falling into the debt trap? Top saving tips for the middle-class families

Today is the world of Easy Monthly Installments and instant cash loan provided by various banks and finance companies. This not only make easy to fulfill short term or long term financial needs but also to acquire assets like Home, Car, Gadgets etc. for ease of life. Different offers, attractive interest rates , No cost EMIS, Exchange Offers often lure to grab these opportunities. Even these facilities are made so easy that anyone can avail it either visiting their branch offices or apply through online loan apps and portals. All these Financial facilities are very helpful if are opted wisely. An unplanned decision making while opting these options to get a financial need fulfilled could lead to financial chaos and Debt Trap. Now the question arise how these Debt Trap Arises?.

What is Debt Traps?

A Debt trap is a situation when a borrower is not able to make repayment of his borrowing fully of partially. This could be due to so many seen and unseen circumstances that may arise during the tenure of repayment. There are some of the reasons which may create a Debt Trap for any one. 

Unplanned Decision Making– Usually a debt trap arises due to the unplanned decision making. 

Excessive Loans, buying stuffs on installment and sourcing finance from other financial institutes without having a plan of repayment drag the borrower to a Debt Trap later or sooner. Even financial institutes check the credibility of borrower before lending which includes various factors like number of loans pending, delay in paying installments, settlements, all these factors shows a borrowers repayment. An over borrowing than repayment capacity led the borrower to financial crisis.

Excessive Use of Credit Cards– Credit Cards is good if used wisely. There are lots of benefits associated with Credit Cards which make it very attractive option to use instead of cash like Cash Back, refund of surcharge, loyalty points etc. This is the option that enables a borrower to just swipe now and pay later. This look so easy but without spending the real cash one could feel misled at the time of Credit card bill payment. Spending hard cash in real time showcase the real position of current and future funds availability to meet the future liabilities. A little ignorance can create big trouble in form of late fee charges, higher interest rates on outstanding etc.

Unseen and unplanned circumstances:  There are some unseen and unplanned circumstances that might happen and create financial turmoil. Natural calamity, pandemics, health issues and accidents could the reason for Debt Trap.

How to avoid Debt Traps?

By taking some important steps in day to day financial decisions the situation of Debt Trap can be avoided. Just need to be cautious and calculation for all the present and future requirement of funds. There are some measure that help in avoiding any financial crisis. 

Calculative Borrowings: All the borrowing decisions should be the based on calculations. There are so many financial institutes which offer easy and quick loan in India. A miscalculation could be harmful. How much amount required, what is the payment schedule, interest rate, Earning and Payment ratios, monthly expenditure, future liabilities, other burden on earning or salary etc should be taken into consideration while making a borrowing decision. Always have a budget in mind to act within the limit. A

On time Payment: Repayment schedule should be adhered strictly. All payments or installments should be met as per their due date. This not only create a healthy relationship between the borrower and lender but also increase the credibility of the borrowers too which in turn brings more opportunity to finance future.

Wisely use of Credit Cards– Credit cards should be used wisely taking into consideration the availability of funds on due date, future liabilities. Higher Credit Limits, Insta Loans on credit card limits, Cash withdrawal facilities on Cards are helpful and useful in various situations but if used wisely.

Prioritize the Payments: When there are several loans, the priority should be given to close the costliest loan. For example Home loans are generally cheaper than the Personal loan and also Are for longer tenure therefore priority should be given to close the personal loan first in order to save high interest payable on such loans. 

Preparedness for contingencies– Uncertainty is always there in life. Job loss, accidents, natural calamity etc could make anyone weaker in terms of financial health. Therefore one should be prepared for any unforeseen moment. Savings in different forms like FDs, Short terms investment plans, gold, etc remain very helpful in such adverse events. 

Additional Income– In order ti sustain and support the debt one should find put new ways to increase the income. Additional income is not only helpful in reducing Debt trap risk but also it gives more options to increase the savings. 

Keep a close watch on Credit Score– Credit Score is the measure of a person’s credibility or loan taking capacity. Timely payment, healthy loan history, No dispute or settlement etc all these create a healthy Credit Score which in turn could help in future loan requirements.

Protection against Health related issues– Healthy life is all what everyone long for. Being healthy is good for all sphere of life but again there is a n uncertainty. Therefore it is better to be protected against any miss happening due to health related issues. A very high percentage of Debt Trap victims are due to medical expenses. One should insure himself with good medical and Life insurance policies which can provide adequate funds in medical contingencies or after death benefits to family protecting them from effect from miss happening caused due to medical issues. 

Avoid to have too many Loans: It is difficult to manage too many loans. Repayment schedule for each loan may vary which make it more difficult to manage the payment. Auto pay is helpful in this situation but rather rate of interest and cost of every loan may different from each other. It is better to consolidate several loans to single with one rate of interest. This would reduce the chaos and also save lot of money by low rate of interest. 

Easy online cash Loans, Credit cards, Collateral Security Loans, buying assets on EMIS are very good option to meet all goals if used in perfect manner. Therefore it is better to think about all the pros and cons before taking any financial decision to avoid Debt Trap. 

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