Advancements in the fintech sector have simplified the process of getting an instant personal loan or any other form of credit. However, opting for credit without having a proper repayment plan in place can overburden your finances.
Too much debt can even lead to a debt trap, which is harmful to your creditworthiness and finances. There are many reasons why one may get stuck in a debt trap. This includes high interest rates, unexpected job loss, taking on more credit than you can manage, and more.
However, as overwhelming as it may be, you can escape a debt trap. With some discipline and the responsible use of credit, you can recover from a debt loop and rebuild your financial well-being and creditworthiness.
Read on to learn what a debt trap is, how to use an to get out of it and other easy tips.
Understanding What is a Debt Trap
A debt trap is when you, compelled by the situation, may take more loans than your financial capacity allows. In simple terms, a debt trap is when you are stuck in the loop of taking on new credit to pay your existing debt.
In this loop, your principal amount does not reduce, and your interest keeps piling up, leading to a significant outstanding amount. Some credit forms that can easily put you in a debt trap are credit cards, payday loans and other short-term but high-interest credit facilities.
How Can Instant Personal Loans Help Get Out of Debt?
If you are wondering how taking on a new debt can help you get out of a debt trap, the answer lies in how you utilise the funds. An instant personal loan comes with no end-use restrictions. It is a diverse financing option, and you can use it as a travel loan, , home renovation loan, etc.
As such, similar to how you can get a wedding loan to finance your marriage celebration, you can get a debt consolidation loan to manage debt. Debt consolidation is one of the most effective and popular financing solutions to overcome the debt trap.
By consolidating your debt with a personal loan, you can streamline the repayment of your existing loans and credit cards and repay efficiently and comfortably.
To understand this concept better, say you have availed 3 different loans. In this case, you are making three monthly payments and paying three different interest rates. Even if you miss a single payment, the penal interest can increase your outstanding amount.
However, you can consolidate these loans into one loan that covers them all and repay with just the consolidated EMI by getting an instant personal loan. With this loan, you can pay off all the existing loans.
You will then repay only the personal loan amount. As such, your repayment burden is reduced, and it can become easier to keep track of your repayment. Moreover, most lenders offer high-value funding for this purpose, and you can get financing of up to ₹40 Lakhs or more.
Here are some top features of a personal loan that aid in overcoming debt:
You can get financing without any collateral
You can get quick approval
You can use the funds without any restrictions
You can get a flexible repayment term
You can get attractive interest rates
With these benefits, a personal loan allows you to make better financial moves. It allows you to access an affordable solution without risking your assets as security, thus emerging out of a debt trap.
4 Tips to Overcome Debt Trap Quickly
Here are some suggestions you can consider:
Restructure Your Repayment Plan
Being unable to repay debt is a significant reason as to why the debt keeps piling on. So, when you get stuck in a debt loop, try to talk to the lender about restructuring your repayment plan. For instance, you can increase the tenure of your instant personal loan and lower your EMI.
Doing so will ease the repayment burden. However, there may be certain terms and conditions to this. So, read them carefully and assess the costs before you restructure your repayment.
Make a Budget and Payment Strategy
If you want to get out of a debt trap quickly, make a budget to prioritise your loan. Start by noting down all loans and credit card bills you need to pay, after which you can either make a budget according to the snowball or avalanche strategy.
With the snowball method, you pay the smallest loan amount first and then put the outstanding budget toward other EMIs. In contrast, with the avalanche method, you pay the minimum dues on low-interest credit and then redirect the remaining funds towards the highest-interest credit.
With the first strategy, you can repay your loans faster, but the second method allows you to save more on interest over time. However, your finances are a crucial factor that you need to look at before deciding on the strategy.
Liquidate Your Assets and Investments
To overcome the debt trap, you can also sell or auction valuables such as shares, bonds and other investments or assets. This method can help you get quick cash without taking on a new loan. However, ultimately, you will be losing the asset you liquidate. So, be sure to consider the costs and losses before taking this step.
Assess Your Income and Expenses
One reason you may not be able to make an EMI payment is that you may not have enough disposable income. This means that once you factor in your other essential expenses, the available income may not be sufficient to pay the loan.
In such instances, you can assess your expenses and determine what is truly necessary. If you find recurring expenses that are not necessary, you can redirect those towards repayment.
You can also look at options to increase your income so that you have a higher disposable income. You can club this strategy with using an instant personal loan for debt consolidation.
Remember, discipline and responsible use are crucial not just for getting out of the debt trap but also for staying out of it. You should also not take on any debt while using an instant personal loan to consolidate your existing debt.
This will help ensure you do not go back to the same cycle. Once you clear all your dues, make sure you monitor your finances. Ensure that the total of all your EMIs is under 50% of your income and your credit utilisation is under 30%. Maintaining these ratios will enable you to have a financially healthy life.