Individuals tend to accumulate debt over time. Some of the debt types are good like a Home or a Car Loan, which are deemed to be Secure Loans. Sometimes one is also forced due to unprecedented situations to take a high-cost debt, which may be in the form of Credit-Card dues or borrowing from the market at very high interest rates. All of these could push you into a corner and eventually lead into a debt trap which means that you have more debt than you can repay.
In this blog, we will go over 4 ways one can get out of the dreaded debt trap
Opt for Debt Consolidation
One of the best ways to get out of the debt trap is debt consolidation. This means that you can opt for a new, lower-cost Personal Loan, financed by some other source and pay of several of your pending debts. When you consolidate your debts, you are combining multiple debts into a single, larger debt (such as a loan). Consolidating your debt also allows you to opt for favorable payoff terms, lower rates of interest and lower EMIs. Debt consolidation can be used as a tool to deal with various forms of debt such as, student loan debt, credit card debt, and other liabilities.
Use the snowball or avalanche method
The “snowball method” in simple terms, means paying off the smallest of all your debts as quickly as possible. Once that debt is paid, you take the money you were putting towards paying of the debt and roll it onto the next-smallest debt owed. Ideally, this process would continue until all remaining debts are paid off. As you keep on rolling the money used from the smallest balance to the next on your list, the amount “snowballs” and gets larger and larger and the rate of the debt that is reduced keeps on accelerating.
In contrast, the “avalanche method” focuses on paying the loan with the highest interest rate first. Similar to the “snowball method” when the debt with the highest-interest is paid off, you put that money towards the account with the next highest interest rate and so on and so forth, until all the debts are paid off. By focusing on the loans that are the most expensive to carry, in the long run, would effectively mean you should pay less and save money over time with this method, as it addresses high interest first.
You may save some money with the “avalanche method” but if the principal is large, the time it may take to pay off debt with the highest interest can be discouraging for many and make it difficult to stick to the plan. Paying off small debts quickly can feel rewarding mentally. If you prefer to see progress quickly and work your way up, then the “snowball method” may be a better fit for your debt management goals. Both these methods are viable to get out of the debt trap, depending on your preference.
Refinance your debts
Debt refinancing is the replacement of an existing debt by means of another debt with terms and/or conditions that are more favorable. In other words, debt refinancing refers to the replacement of existing debt with new debt.
Debt refinancing is commonly used to take advantage of new financing that offers more favorable terms and/or conditions. In such a situation, an individual or company will settle their current debt outstanding through issuing new debt with more favorable terms or conditions.
The main difference between debt refinancing and debt consolidation, is that debt consolidation is a method to manage multiple debts. On the other, hand debt refinancing is usually used to manage one debt at a time.
Stick to a budget
When you’re trying to pay off debts when stuck in a debt trap, sticking to a budget can help you reach in a much more faster and efficient manner. You will be able to cut back on nonessential expenses and redirect that saved money to credit card and loan payoff. You can even set up monthly transfers so debt payoff happens automatically without much hassle.
A budget also lets you concentrate on debt repayment while ensuring you don’t ignore other important financial priorities. It gives you structure, a method to allocate money to emergency savings, and a clear way to reward yourself for making progress.
It can be challenging to break the chains of a debt trap. But by following these strategies, you can start making strides toward getting out of debt and improving your overall financial health. Just be sure to understand why you initially got into debt and modify behaviors to prevent yourself from repeating the same cycle once your balances are paid in full.