Risks of Falling into Debt Trap
Gone are those days when not only availing a loan but also opening a bank account was difficult and required recommendations from known customers. Now, if you have a job or business, the loan will come to you. It is easy to get a loan from various sources: it can be from a financial institution or an unorganized money lending sector or from some mobile apps. Credit is just a click away.
You must have got a phone call asking if you want a credit card, if you are an employee or if you are a regular income taxpayer, or if you have a good credit score.
As it is easy to get a loan, it is much easier to fall into a debt trap too. A debt trap is a situation where you are in more than one debt and unable to manage your debts and your living expenses; you are forced to take on more debts to repay existing ones.
Warning signals that you are in a debt trap:
1. You keep thinking about repayments to various sources from where you have borrowed and also about raising funds, as you know that the inflow or income doesn’t suffice for repayment.
2. You consider taking more loans to repay existing loans, don’t hesitate to ask people for money.
3. You receive default calls and notices from banks and other institutions.
4. You have absolutely no savings, investments, or emergency funds.
5. You consider not paying income tax or other important taxes, health, and vehicle insurance premiums as you have no funds and you have to prioritize repayments alone.
6. You pay only the minimum dues on credit cards and accumulate the remaining balance for subsequent months.
7. When your monthly repayments exceed 50% of your monthly income.
Above are seriously dangerous signals which affect the quality of your life. You may not be able to lead a happy life, plan for a vacation, or even buy the necessary things. The relationships within family and friends also become strain-full.
What causes or leads someone to fall into a debt trap?
1. Not having financial knowledge: Knowledge of money management, how money works, the necessity of loans, how loan works, etc. Before stepping on for a loan, please consider the following:
(a) Understand the necessity of debt or borrowing
(b) How the repayment schedule is made.
(c) Have knowledge of Loan Tenure and Equated Monthly Instalments.
(d) Interest Rates- compare with various sources.
(e) Good debt and bad debt: The borrowing used to create an asset or to invest is good debt while borrowing to spend or buy something for a status symbol and not for a necessity is bad debt.
(f) Knowledge of using credit cards: Credit cards are a good way to plan and spend where you get a repayment period but a misuse can cause you to burden as you may lose track of your expenses.
2. Desire to lead a luxurious life
The urge to acquire things that are not necessary, falling prey to marketing gimmicks, and offers, and buying things in installments rather than at one time because you think it is convenient to make “small” repayments every month are all the biggest financial mistakes that can make you fall into a debt trap.
Well, the good news is that there is a way or multiple ways to come out of the debt trap which I will cover in the next article.
Sandhya Naren is a versatile professional, serving as a Branch Manager in a Public Sector Bank while also being a writer, storyteller, and Certified Women-Coach in Personal Finance. She is the co-founder of Manasa Learning Solutions, an academy providing life skills training for women and children.
