A debt trap is commonly a financial event when you are not able to timely pay the EMIs, due to which, there is an increased amount of outstanding debts. The situation worsens if you have taken additional loans, which you cannot repay. However, you can tackle a debt trap wisely, and we bring to you the best solutions for it.
1. Analyze your Finances: Firstly, you have to understand the extent of the debt. Make a note of all the debts, the remaining loan amount to meet, and their interest rates. This is how you can tell, which loans are impacting your finances the most. Assess your expenses for daily needs and insurance premiums (if any), and calculate the total amount to be repaid.
2. Speak to a Financial Advisor: Most people are not sure how to deal with a debt trap, and may just speak to their friends and family about it. While the latter could help in case anyone is ready to lend you money to overcome the debt, it may not necessarily assist you in understanding, which debts to pay off the first. Thus, if outstanding loans are too much, you may seek the assistance of a financial advisor to draw a plan for settling the loans.
3. Liquidate your Investments: You can utilize low-yielding investments for paying the loans. However, liquidating any investment must be done carefully. Liquidate the ones, which won’t leave your finances dry in the long-run, and are also the most appropriate for paying off debt. For example, you can sell a land or residential property to clear off most of the debts, in case the property in question is not the only investment, or liquidate a bond, share and fixed deposit etc.
4. Consider a Personal Loan: If a new personal loan is availed at a low-interest rate, then you can pay off a higher costing loan with it. You may even think of a small cash loan if the loan is to be repaid in up to INR 50K. However, your credit score and income must be convincing enough to take a new loan, and a debt trap may sometimes be a cause of loan rejection.
5. Loan against Assets: If you want to avoid the interest rate on another loan you take to pay off debts and s, then you may contact members or peers who are willing to give you monetary support against an asset such as gold, property or an item equalizing monetary wise with the borrowed amount, with no added interest. However, putting an asset at stake is a crucial decision (and may incur an interest rate on the loan taken), and must be considered if you cannot find any other way out to pay for the loan.
6. Get Rid of Expensive Loans: You must prioritize debt repayments as per their interest rates. Sometimes the debt due with a high-interest rate is not liable to tax benefits and could be the hardest to repay. The loan which has the highest cost of borrowing may be paid off the first, or the one that is nearing the end of its tenure, whichever is the most suitable.
7. Restructure the Loan Plan: Your economic situation during the debt trap may be quite stressful. But, you can consult with the lender to extend the loan tenure, adjust the interest rate, or add security to bring down the loan amount, if possible. Extending the loan term, however, will increase the net payout maybe, but bring down the EMIs.
Out of the above-mentioned ways to fight a debt trap, some options may work out for you, while others maybe not that sound to help you to settle with loans. Consider each of the given solutions from the viewpoint of your personal financial situation, and choose any that assists you in paying off the debts in time.