Loan burden: Your guide to steering clear of financial stress, debt traps

Avoid debt traps by spending wisely, steering clear of impulsive purchases or borrowing and clearing credit card dues on time

Krishna Kanhaiya

The growing ease of access to credit has empowered individuals to fulfil their needs and wants, but it also brings with it an inherent risk: the responsibility of repayment. Failure to meet this obligation can pull a person into a cycle of borrowing that spirals out of control, leading to what we commonly call a debt trap.

In an era where borrowing money has become easier with few clicks in various forms, debt traps can wreak havoc on financial stability and personal well-being.

Once caught in a debt trap, it can feel nearly impossible to escape without significant lifestyle changes or financial intervention.

What is a debt trap?

Debt trap is a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal. The borrower’s inability to repay borrowed money, leads to a cycle of borrowing that is hard to break. Often, people fall into this vicious cycle without realising the long-term consequences. Debt traps occur when you borrow beyond your repayment capacity or fail to manage your finances effectively, causing you to take on more debt just to cover existing liabilities.

Debt traps typically occur when people borrow beyond their repayment capacity, pay only the minimum dues on credit cards, leading to compounding interest, overspend on non-essential items or make impulse purchases and underestimate the financial impact of emergencies or unforeseen circumstances.

It is crucial to identify the warning signs of debt traps. For instance, mounting credit card bills with high-interest payments are among the first signs, besides struggling to meet monthly financial obligations and resorting to new loans to repay existing debt. Recognising these symptoms early can be the first step towards breaking free from the vicious cycle.

Falling into a debt trap can have far-reaching consequences including both financial and personal. These include damaging credit scores due to delay or default on monthly repayment, impact on mental health due to anxiety, depression and frustration, inability to manage emergency expenses and also cause strain in relationships within family and friends.

Also read: RBI penalty on HDFC Bank: Know the recovery agent rules that lenders cannot violate

How to prevent debt traps

A debt trap can be avoided by building an emergency fund, prioritising debt repayment, steering clear of impulsive borrowing, exploring the best available lower interest rates from RBI-registered lenders while initiating the borrowing process.

Also read: How to keep your credit card spending in check and maximise rewards this holiday season

Breaking free of debt burden

In case one has fallen into a debt trap, he or she must quickly regain control of the finances by avoiding new loans, consolidating existing debts into a single lower-interest loan, negotiating with the lender to restructure the existing loan or opt for reduced payment plans and implement a strict budget by limiting discretionary spending.

Managing debt efficiently is a critical aspect of maintaining financial health. While loans can be a valuable tool for achieving personal and financial goals, mismanagement or borrowing from unethical lenders can lead to serious financial pitfalls. A little awareness and effort can go a long way in preventing debt traps and safeguarding one’s financial future.

It is essential to only borrow from transparent and honest lenders, preferably those registered with the RBI and to stay clear of those who might sanction loans even if your repayment capacity is compromised. Borrowing from such institutions can leave one vulnerable to unethical practices, making it difficult for you to recover from the tough financial situation.

By proactively managing your finances, planning for emergencies and being mindful of where and how you borrow, you can prevent debt from spiralling out of control and maintain financial stability in the long term.

(The author is the CEO of Mirae Asset Financial Services)