7 Signs that you are falling in a Debt Trap
Debt has become an unavoidable part of most people’s lives nowadays. There has been ease in regulations in getting loans in the last decade. People require loans to meet their personal needs including buying a car, house, for education, for marriage, for home appliances etc. and in some cases even for emergency medical needs. EMIs are one of the most popular options offered by lenders to their borrowers by giving them an option to pay in small amounts, i.e installments.
It is not bad to take a debt, as it helps afford the things one wants to buy by way of paying through installments as they can’t pay the whole amount in one go.
However an excessive use of debt in meeting your financial needs puts you into a debt trap and getting out of it becomes very difficult. In today’s article we will list down some signs that show you are falling in a debt trap and need your attention to make your financial life more secure. These are:-
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1. Borrowing for Regular Expenses:
It is an alarming sign that you are falling in a debt trap when you start relying on debt for meeting your regular expenses such as utility bills, school fees of children, groceries etc. It means you are not even able to meet your day to day expenses from your income. In order to correct this you need to plan your finances well.
You can make a monthly budget for your expenses and cut down on some unnecessary expenses. Along with this you need to save some part of your income so as to make your future secure.
2. Not having an Emergency buffer:
If you do not have an emergency fund, then you might be falling into financial trouble. In times of uncertainties such as job loss, salary delays, medical emergencies you may have to borrow to pay for your bills in the absence of an emergency fund.
Getting into debt can be avoided with the help of reserved funds made for uncertainties and can protect you from the high interests burden they carry.
3. Not Paying your Credit Card bills on time:
Not paying credit card bills on time comes with penalty interest rates of around 35-40% interest rate p.a.. When you miss out on paying your monthly dues, you are burdened with the high interest costs which hits your finances hard.
Also avoiding or not paying on time any kind of bills,EMIs, loan repayments etc. imposes high penalties on the borrower and thereby increases the costs.
4. Banks refusing Loans:
When banks start refusing to give you loans, this is a clear sign that you are bad at paying them off. This happens when you have a low credit score i.e CIBIL score. In other words you have low credit worthiness.
When you start defaulting on loans or delaying them ,your credit score starts getting lowered. So one should always pay attention to their ongoing loans & emi, keeping track on their due dates will help in paying them on time.
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5. EMIs Exceeding 50% of Income:
This is very dangerous for your financial health when your loans & emi payments consume more than half of your income.
Easy availability of EMIs even on small spends lures individuals to purchase unnecessary stuff and spend more, thereby these small EMIs add on to become big at the end.
Having a high portion of debt will leave you with very little to meet regular expenses and monthly savings.
6. Loans to Repay Loans:
An alarming sign when you start borrowing or taking loans to pay off your other pending loans/EMIs.
This makes you end up paying even more in interest payments. So it is important to plan your finances well, you should resort to loans only when you are sure you will be able to pay it off on time.
7. Credit card Cash withdrawals:
Cash withdrawals from credit cards can make you fall in a debt trap by way of the high cash advance fees they charge, around 3% of amount withdrawn per month which is almost 35-40%(varies across banks).
So one should always keep in mind about the high advance fees and avoid taking cash advances from Credit cards.
These were some of the signs that show you are falling in a debt trap. If you see yourself making these mistakes, you really need to plan your finances well and avoiding them will give you a more financially secured future.