Smart Tips to Avoid Falling in a Debt Trap

Posted on Thursday, April 6th, 2023 | By IndusInd Bank

From utilizing temporary cash inflows to separating needs from wants,
there are various smart ways to avoid falling into a debt trap. You could also consider an IndusInd Bank personal loan for debt consolidation – the interest rates are attractive and the documentation and approval process is simple and hassle-free.

While attitudes towards various forms of credit such as loans and credit cards have evolved over the years, the idea of being stuck in debt is still considered undesirable and if possible, to be wholly avoided.

Unfortunately, financial emergencies can strike anyone at any point of time, compelling them to incur debt. Even in such circumstances, an individual must ensure they are able to repay their loans on time using available sources of income. Not doing so could, quite easily, cause a person to fall in a ‘debt trap’ – a situation in which your debts outweigh your repayment capacity, forcing you to take out additional loans to manage your existing debt obligations. Needless to say, one should never allow their debt obligations to spiral out of control to this extent.

Here are some smart tips to avoid falling into a debt trap.

Five Tips to Avoid Falling in a Debt Trap

1) Segregate Needs from Wants: Your spending patterns and larger financial
behaviour are largely shaped by your lifestyle. While it may sound unlikely, impulse spending is often the cause of people falling into debt traps. So learn to differentiate between essential needs and non-essential wants, and avoid spending on frivolous big-ticket purchases through credit.

2) Follow the Thumb Rule Regarding Monthly Debt Servicing: The universal rule regarding your monthly loan commitments is that your total EMI expenses should not exceed 40% of your net monthly income after tax and other mandatory deductions. In case of a home loan, this figure could go up to 50%. For example, if you have a monthly income of INR 1 lakh, EMIs should not consume more than INR 40,000 of it.

3) Make Use of Temporary Cash Inflows: Whenever there is a temporary inflow of funds such as an annual bonus, returns on any investments, or the sale of property, use these to prepay high-cost debts such as credit card, personal, and car loans. Repaying high-interest loans before time helps you save extra money that would otherwise have been spent on paying higher interest charges.

4) Create an Emergency Corpus of Funds: One of the best ways to avoid falling into a debt trap is to save money, creating a special fund to take care of emergency expenses. Best practice entails establishing an emergency corpus equaling at least 6 months of your salary set aside. An emergency fund such as this can help you overcome temporary crises such as loss of employment or a protracted illness without having to resort to a credit card debt or high interest loans.

5) Consolidate Various Loans: Instead of the hassle of paying off various loans with various interest rates, you may want to consider debt consolidation i.e. taking out a single loan to pay off your other loans.

Taking an IndusInd Bank personal loan for debt consolidation will substantially help reduce EMI outflows, making your life easier. For instance, there would be no more multiple repayment dates but one single prefixed payment date every month.

Why Choose IndusInd Bank Personal Loan?

IndusInd Bank offers various types of personal loans, such as personal loan for education, personal loan for medical expenses, and personal loan for debt consolidation. With great features such as attractive rate of interest, flexible repayment tenure – ranging from 1-4 years – simple documentation and instant approval, an IndusInd Bank personal loan can help you obtain the funds you need for your specific needs.

While being stuck in a debt trap can cause severe stress and psychological issues, not to speak of financial ramifications, it must be noted that not all debt is actually bad. Good debt – such as a loan taken out for business or educational purposes – could increase your wealth, while bad debt – for example, borrowing to buy expensive food, furniture, and clothes – costs you money for objects meant for consumption or for depreciating assets.

Being aware of the distinction between the two can help you plan and manage your debt liabilities and steer clear of 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.