For many of us, especially the salaried class, debt is unavoidable. With instant loan apps such as Cashe, Kreditbee, taking personal loans anytime and anywhere has become easy. While being in debt or loan is not a good thing, some kinds of loans or debts are necessary for certain situations and are classified as good debts. A personal loan taken from Kreditbee or any mobile loan application or bank to buy a laptop for your business, student loan for your child, home loan are generally considered as good debt as it helps you generate money and build net worth over time. The problem starts when you avail any form of loan to purchase a depreciating asset, such as for buying a car, on clothes, as it is considered a sign of you falling into a debt trap.
Let’s understand the signs which indicate you are in the pre-debt-trap period and how you can get ahold of your expenses:
- Paying only the interest component on credit card bills: Most people only pay the interest component of their total outstanding credit card bill or personal loan bill of Cashe and let the whole bill roll over for the next month. This is usually the first sign that indicates you are falling into a debt trap because if you keep on doing this, interest on the bill, which is usually on the higher side, will continue to accumulate, and you would not be able to pay off your debt even in ages.
- Taking a new loan to pay off the earlier debts: Availing a loan from Cashe, Kreditbee, or from other instant loan apps or doing balance transfer from one credit card, unless these activities are aimed at helping you increase your net worth, are a clear sign of you falling into a debt trap.
- Paying more than 50% of your income on EMIs: Whether it was a splurge you did during the festive season by availing loan from Cashe, or you mindlessly spent a huge chunk of your earnings on useless items only to be left with huge EMI obligations, if more than half of your net income is going towards paying off EMIs, it is a sign of debt trap you are into.
- Meeting regular expenses with your savings fund: You must have saved money for your child’s education, retirement fund, emergency, unexpected medical expenses, and if you have to take out money from either of these funds to meet your regular home chores expenses, it is clear your expenses are mounting over your income.
- Borrowing money to meet regular expenses: If you have to borrow money from your family and friends to meet your regular monthly expenditures, it is a clear and cut sign that you are falling into a debt trap.
Simply put, a bad trap is a situation in which you can’t repay the loan due to high-interest rates, limited financial resources, and multiple EMI payments on kreditbee. On the other hand, if you gain a thorough understanding of the debt you are in, you will be able to get out or break free from this trap and be able to live a financially stable life. Here is how you can do so:
- Prioritize debt: If you have taken short and long-term loans, then first clear off the loans that are most costly in terms of interest rates, overhead costs, and fees.
- Track your expenses: If you do not have the habit of saving money, start by keeping track of your expenses. Meanwhile, reduce your spending on non-essential items such as movies, luxury purchases, and leisure tips. You can also save money by carpooling or consuming home-cooked meals instead of ordering takeout. If you have extra time left after office hours, take on a side job to supplement your income. All of this may seem like an added pressure but remember it is only temporary until you are back on track.
- Ask your bank or financial institution to increase your loan term: If you have a long-term loan such as a Home loan, you can ask your bank to extend your loan term. This will raise your interest rate, but it will lower your monthly obligation of paying EMI & give you more time to repay or pay off your debts. Learn to negotiate the interest rate with your bank if you have a long-standing partnership with them.
- Clear your outstanding dues in one go: You might think that clearing credit card bills in parts will help you save money for other things, but this is where you are wrong. For example, if you pay 90% of your total credit card bill, the bank will charge interest on the total amount in the next billing cycle and not just on the outstanding 10%. Hence, it is advised you must clear all your outstanding amounts in one go rather than paying the minimum amount due every month.
- Take insurance: This might seem like an additional expense, but taking adequate cover against death, disease, disability, and damages protects you against unforeseen events and ensures your family is protected against unexpected expenses.
- Avoid loan settlements: When you are financially strained and can’t seem to repay your debts on time, your lender may offer you an option to do a loan settlement option. It involves paying only the principal amount, and the bank will consider your loan “settled”. Remember, the loan settlement will get the recovery agents off your back, but the settlement will reflect on your credit report that can make future borrowings very difficult.
Marketing strategies work in such a way that we as a consumer get enticed by words such as ‘offers’, ‘discounts’, ‘easy EMIs’, ‘no cost EMI’. This is not to say that such offers do nothing; for a person who urgently needs, for example, a laptop for their business will find these offers or personal loan from Cashe, Kreditbee, and other such instant loan apps quite helpful as it is helping them build their net worth while allowing them to pay off dues in a staggered manner. One has to draw the line between compulsive spending and being mindful of their finances. While you may have fallen into the debt trap, the aforementioned tips will help you get out of it as well. Simple tips such as paying off your outstanding credit in one go and not taking out money from an emergency fund will ensure you do not fall into the debt trap ever.
Nikhil Kore