Are you continually re-borrowing or rolling over your loan repayment because you can’t afford the scheduled payments on the loan’s principal? If you answered yes, you are caught in a debt trap – a sticky situation to find yourself in. A debt trap is a situation where it’s impossible or hard for you to repay what you owe. It often arises due to short terms and high-interest rates on loans, and are an indication of predatory lending.
Understanding how debt traps work
Each time you borrow money, two primary elements apply the loan principal and interest. The former is the amount you borrow, while the latter is what the lender charges on the principal. Repaying the loan means clearing both the principal and interest. Repaying the principal is particularly vital as it is the only way you make progress towards clearing the debt in full.
Now a debt trap happens when you are not able to repay the loan principal but can only pay the interest. Since repaying interest does nothing to lower the principal, you never get any closer to clearing the debt. So it is like a rat race – an exhausting routine that goes on and on. Other features that can result in a debt trap include lump-sum repayments, short term repayments, and loan rollover. In most cases, all these features occur on the same loan.
So, how do you get yourself out of a debt trap?
Cut down on your spending
Slashing your spending is easier said than done. With a particular lifestyle onset, it can be hard to adjust downwards. However, if you want to get yourself out of the situation, cutting down on your spending is the best thing to do. If you think about it, a significant amount of your income is going to repay loans – and the only way to survive without taking other loans is by minimizing your expenses. Selling stuff you don’t need, like an extra car or a boat, or getting a loan from a loved one can be a great way to eliminate a high payment loan. This won’t be easy, but it will go a long way.
Avoid adding salt to the injury
It beats logic to try to offset some loans and still keep taking new ones. If anything, this will only sink you deeper into the debt trap. Your goal should be not to take any new loans but focus on ways to clarify what you already own.
Differentiate between needs and wants
In today’s prosperous world, it is difficult for people to tell apart needs from wants. Many people see going out every weekend, or getting a new car every five years, or traveling for vacations as want. However, while these are critical, they are not a necessity. A want is something you desire, but can live without, and include things like cars, designer clothing, upscale dining. Eating out instead of cooking at home or buying new clothing when old ones are still good condition can also be seen as wants. Needs, on the other hand, are things we need to live a healthy, happy life and include food, shelter, clothing, and health. Focusing on needs more than wants in your budget is a great way to escape the debt trap.
Create a budget
Sometimes, debt management can be as easy as creating a budget and sticking to it. With an idea of what your wants and needs are, it becomes easier to know what you need to include in or exclude from your budget.
Increase your income
Of course, the imbalance between what comes in and what goes out is what causes you to go into debt. If you had enough income, you wouldn’t have a debt problem. So, a great way to even out your income and expenditure is by increasing your income through a side hustle or a better paying job.
Work with an expert
Doing the above can help you get off the debt trap, but if all else fails, you may want to bring in a debt management expert. These professionals have what it takes to eliminate creditors from your life and help you achieve the financial freedom you’ve been searching for.