Acknowledging that you are over-leveraged is critical in escaping a debt trap. However, to get out of this situation, you first need to understand what is a debt trap. It is a circumstance where one is compelled to take out more loans to pay off existing loans, thereby creating a cycle of debt.
Over time, clearing debt becomes more challenging due to increased costs, restricted finances, or other reasons. Thankfully, you can get out of this cycle by understanding your debt and finances. Having this information will enable you to manage them better and become debt-free.
Read on to learn how to manage your existing dues and how to be free from debt.
Understand Your Debt
To understand your debt, consider these four categories to see where your loan fits:
It is a high-cost debt usually linked to credit card spending or cash loans where interest rates are too high and not paying on time results in a multiplier effect on the outstanding balance.
These are EMI loans linked to buying products or going on holidays. This type of debt is usually not visible as it gets camouflaged under subvention or supplier funding.
These are long-term loans for purchasing cars and homes.
It allows you to use asset-class products to take a loan. Some common examples include a gold loan and a loan against property.
Also Read: Debt Consolidation With Instant Loans
5 Tips to get out of a debt trap
If you are wondering how to clear debt fast, then it is important to remember that there are no shortcuts or overnight solutions to becoming debt-free.
Here are some solutions you can try to reduce your debt burden:
Opt for a Balance Transfer
Financial institutions offer the balance transfer facility to people with sizeable outstanding dues from one credit card to another. You can opt for a fixed-duration balance transfer, where the interest rates are usually lower, depending on your bank.
Convert Outstanding Balance to EMIs
If the net outstanding across credit cards is too high, it is advisable that you take a small personal loan and repay your credit cards. This is because a personal loan interest rate can start at 12% per annum or lower in some cases. On the other hand, credit card debt comes above 2% interest per month (36% – 46% per annum) and also attracts service charges.
Negotiate Lower Interest Rates with the Existing Lenders
Most institutions allow some negotiation, usually linked to a bullet payment. By lowering your interest rates, you can reduce your overall debt from that specific lender and give yourself the flexibility to repay the loan without stretching your finances.
Pay Credit Card Outstanding Balance by Opting for a Salary Advance
Usually, you can manage credit card outstanding by paying over two salary cycles and managing funds better. Payday or bridge salary loans can help you cover this cost easily.
Avail of Loan Against FDs or a Gold Loan
Loan against assets comes at a much lower interest. Usually, loans against FDs come at interest rates that are lower than some other financing options. Gold loans also come with attractive interest rates that are generally lower than those levied for unsecured loans. Thus, such options can be a good way to reduce debt burden.
In addition to the above solutions, remember these thumb rules when taking a loan:
- Your loan amount should be at most 8X your annual salary.
- Revolver loans should always be at most 50% of your monthly salary.
- Total EMIs should be at most 50% of salary.
A simple life rule to manage finances is to save 30% of your salary. However, if you still have a debt cycle, you can use a low-interest Instant Personal Loan from Fibe to pay off existing dues. You can rely on Fibe to get a loan in just a few minutes.
Our Instant cash Loan offers funds of up to ₹5 lakhs to clear your dues easily. With simple terms and competitive interest rates, you can easily pay off your existing debt. Download our Instant Loan App or log in to our website to get hassle-free loans.
FAQs on How to Come Out of the Debt Trap
How can I clear my debt without money?
If you are wondering how to come out of debt trap, you can get a personal loan to secure the required funds. You can also explore other options like consolidation of debt to streamline your repayments and clear your dues.
How can I clear my ₹20 lakhs debt?
There are various strategies you can use to clear your ₹20 lakhs debt. For instance, you must clear your high-cost debt first. To get out of a debt trap, you also need to prioritise your essential expenses. In addition, you can take a personal loan at lower interest rates to pay off your existing loan and continue repaying the EMIs of new loans at lower costs.
What is the best payment method for debt?
You can use three different methods to repay your existing loans. The first is the debt avalanche method, where you pay the largest debt first and then pay the minimum due on smaller loans. On the other hand, you can also opt for debt snowball, where you pay the smaller loans first and clear larger loans later on.
In addition, there is a debt consolidation method, where you can combine all existing loans into a single loan account with a lower interest rate.
Is EMI a trap?
With Equated Monthly Instalments (EMIs), you can repay your debt in small instalments due every month. While the fixed component of EMIs remains the same, the interest component changes depending on how you make the payment. This can potentially push you into a debt cycle. However, if you can manage the EMI and borrow as per your finances, you can avoid getting into a debt cycle.
Can I just ignore debt?
No, if you ignore debt and do not make repayments, the lending institution can pursue legal actions as per the terms. Moreover, non-repayment also affects your credit score negatively. This will make it difficult for you to take a loan in the future. So, be sure to repay on time and negotiate with the lender if needed.
