How to avoid falling into a debt trap with personal loans

Posted on Wednesday, December 13th, 2023 | By IndusInd Bank

Are you planning to apply for a personal loan online, but are concerned about how to avoid falling into debt traps? Debt can become a hefty burden if not managed well. It can increase financial stress, impede savings, and limit your ability to achieve future financial objectives. A debt trap is a circumstance in which you are compelled to over borrow in order to pay off your current debts. Over time, you find yourself trapped in an unmanageable financial situation that exceeds your ability to make payments, trapping you in a cycle of debt.

Read this blog to understand some crucial tactics to take into consideration in order to preserve a sound financial situation and avoid falling into debt traps with a personal loan. 

Understand what a debt trap is

When you take out a loan from a moneylender, two factors come into play: the principal loan amount, which is the sum you borrow, and the interest, which is the fee the lender assesses on the principal loan amount.

Every month that you pay back the loan, you contribute to both the principal and the interest. This is due to the amortising structures of most loans. This implies that each payment you make towards your loan goes to both the principal and the interest and that your loan is intended to be repaid over the course of a set number of fixed instalments.

You are most likely to get caught in a debt trap if you are unable to make your payments. Wondering how that happens? The interest keeps accruing and the principal does not decrease, making it nearly impossible to pay off your loan.

Create and maintain a budget

Make a sensible budget that details your earnings and outgoings. By sticking to your budget, you can avoid splurging on non-essential items and falling into a debt trap with an instant personal loan. Set aside money for savings while allocating monies for basics like rent, utilities, and groceries. You can prevent splurging on non-essential products by staying within your budget, thereby avoiding falling into a debt trap with an instant personal loan.

Keep an emergency fund

Create an emergency fund to cover unforeseen costs. Having a safety net allows you to cover unexpected expenses without resorting to credit cards or loans. Save enough money in your emergency fund to cover your living expenditures for three to six months. This gives you a safety net through tough times and stops you from using debt to cover emergencies.

Utilise temporary inflow of cash

Use any temporary inflow of money, such as an annual bonus, investment earnings, or the sale of property, to pay down high-interest obligations like credit card, personal, and auto loans. By paying off high-interest loans early, you save money that would otherwise go towards interest payments.

Spend wisely

Avoid giving in to the impulse to overindulge in luxury or unneeded purchases. Living within your means helps you stay out of debt. Impulsive purchases may result in needless debt. Spend some time determining whether a purchase fits with your needs and financial objectives before buying one. Put in place a waiting time before making a non-essential purchase, say for a week or 24 hours. This enables you to determine whether the purchase is indeed necessary or whether it was made on impulse, which might result in regret and debt.

Use your credit card effectively

Credit cards are practical, but if used irresponsibly, they can also lead to debt. To minimise interest fees, pay off your credit card balances in full each month. Be careful to pay more than the minimum payment if you are unable to settle the balance in full to avoid paying excessive interest. Maintain a low credit utilisation ratio and refrain from using your credit cards to the maximum. Review your credit card statements frequently to spot any mistakes or fraudulent activities right away.

Save up for major expenditures

Save money beforehand. By saving in advance, you can make these purchases without resorting to credit. Embrace delayed gratification and wait to buy until you have enough cash on hand to do so without using credit.

Why choose IndusInd Bank to get a personal loan?

Utilising a personal loan from IndusInd Bank to consolidate your debt will significantly lower your EMI payments, simplifying your life. The bank offers various personal loan products, including loans for debt reduction, medical costs, and education.

An IndusInd Bank personal loan can help you get the money you need for your particular needs because it has outstanding characteristics including a competitive rate of interest, flexible repayment terms, easy documentation, and instant approval. Additionally, you can use the bank’s personal loan EMI calculator to plan and budget your finances better. Take note of the following before you apply for personal loan with IndusInd Bank:

• You can get a personal loan from IndusInd Bank at competitive interest rates. 
• To submit a loan application, a borrower must be at least 21 years old and be able to provide the required KYC documentation. 
• The loan amount and interest rate will depend on your eligibility.

Conclusion

Although getting caught in a debt cycle can be extremely stressful and have a negative impact on your mental health as well as your finances, it is important to understand that not all debt is bad. Knowing the difference between good and bad debt can help you manage your financial obligations and avoid falling into a debt trap. IndusInd Bank can be your trusted partner in this journey. With its 100% digital application process, quick disbursal, competitive interest rates and flexible loan tenures, an IndusInd Bank Personal Loan can save you from falling into a debt trap. Apply now!

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.