You are considered a victim of a debt trap if you borrow, repay, re-borrow, and roll over the loans because you are unable to afford the scheduled payments on the borrowed sum.
Debt traps are basically situations that prevent you from repaying a loan easily. Wondering how that works?
Whenever you borrow money from someone, two elements come into being – the principal loan and the interest. You will be able to make progress in repaying only when the principal starts decreasing. But there is a catch.
When you repay each month, you move towards getting rid of both the principal and the interest. This is because almost all kinds of loans have a remunerating structure. The loans are designed to be paid off over time.
If you fail to make the payments each month, you have most probably fallen into the debt trap. The principal does not decrease, but the interest keeps accumulating. In order to resolve the situation, you first must identify the below-mentioned signs early.
The EMIs have Exceeded the Income
The experts working in the best debt management companies said owing to the easy availability of finances, most people have turned into compulsive spenders. They get tempted by sales, discounts, special offers, etc., and often purchase items they do not even need on EMIs.
The EMIS may not be big when seen individually, but, when added, the sum becomes huge. When you have to take care of multiple EMIs, you hardly have any money left to spend on the necessities.
If you see that your EMIs have exceeded your income by 50%, know that you are in a debt trap.
Credit Cards are Exhausted
It is so simple to purchase whatever you want just by swiping the credit cards, right? But, in case you find yourself in a position where you have maxed out all of your credit card limits, please stop and reconsider your financial standing.
Loan Applications are Rejected
If your loan application is rejected, then it is the final sign you have entangled yourself in a debt trap. Before approving loans, the banks usually check your credit card report and assess if you are worthy for the loan.
When you are drowning in monetary obligations with zero capacity to handle another loan, do not expect the banks to extend your credit. Even if they agree, the interest rate will be so high that you will forget how to return from the vicious debt cycle.
Also read: 5 types of investments that you can easily invest.
According to the best debt management companies, consolidation is a viable way of getting out the debt trap.
Rather than repaying different loans at different periods, you must try to consolidate the high-interest obligations through a personal loan. With debt consolidation, you just need to think about making a single payment to a single lender each month. So, you end up saving money on the interest, pay off the EMIs timely, and regain financial vigor.
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