About Debt Trap
Loans have made everything very easy and simple. While selecting a loan, one must take careful steps else, it can lead you to a debt trap.
Just imagine, you have an ongoing loan, and you lost your job. What next? How will you pay the running EMI’s Here are some things you must keep in mind such that you do not get into the debt trap:
- Not clear about the finances: You will get into a debt trap if you do not have any idea about your account balance, monthly expenditures, interest rates, fees, and other contractual duties.
- No panning for taxes: When you do not plan your Tax Savings, retirements, and other unpredictable items, you may have your amounts due.
- Shopping till you fall: Good deals on your favorite brands may leave you irresistible but may put you in trouble later, therefore stop buying recklessly.
- Buying on a credit card is different: When you swipe your own Credit Card, it induces a feeling of belongingness to the club of being accepted grown-up.
- Playing with financial goals: Stop struggling with your monetary crisis by using one credit card to pay the outstanding amount of another.
- Living on the edge: Stop paying from pay cheque to pay cheque taking risks with your Health Insurance and Car Insurance.
- Working overnights or underworking: You start working extra hours till late nights to pay the creditors by taking the jobs of average skills and education levels.
- Denying Basic Needs: You get reluctant and deny basic needs to fulfill the basic needs to pay your creditors.
- Relying on someone to help: You keep hoping someone will take care of you and always rely on the other person. Stop it.
Managing your debt:
The debt Servicing Ratio measures the loan borrower’s ability to repay all his loans. This can be known with the help of this formula:
Debt Servicing ratio: Monthly EMI’s / Monthly Net Income:
The lower is the value, the better it is. If the value is greater than 0.5, you are likely to caught in a debt trap.
Tips to Handle the debt trap:
- Take Account: Find out all of your savings and analyze where you spend the most. Go through all bills, bank and credit card statements, and other loan recipients.
- Cut down your expenses: Divide all of your expenses into necessary, important, and entertainment categories. Cut down your expenses of the third category and use this money to pay for loans and undue debts.
- Pay the costliest loan first: Try to repay the most expensive loan first and then start focusing on cheaper ones. Generally, the credit card bills are the most expensive one followed by Personal Loans.
- Try to borrow the cheapest one: Try to take the cheapest loans like Loan Against Securities, saving schemes like FD’s and gold.
- Restructure your loan: If you think the loan EMIs are too big for you, request your bank and ask them to restructure them making it easier for you to pay.
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Special Note: An individual must examine the whole EMI amount payable to the lender with the Personal loan EMI calculator.