Finance

7 November 2022

A month end finance crunch often forces us to go the credit way to supply our wants. Lifestyle expenses, unforeseen medical emergencies, education expenses, home loans and many more expenses can be a deep source of source. Monthly expenses that fall heavy on our pockets – like financing of expenses, paying off subscriptions, using savings to pay off debts, long term auto loans, rising costs of higher education – these garner the title of major debt traps in 2019.  Once credit debt starts piling up, it begins to feel like only a lottery win can help pay them all off. People are largely unaware about their financial standing and forego the necessity of assessing their ability to pay off debts in future. Lack of financial knowledge and market information can throw you into a vicious debt trap without us even realising it. 

Coming out of a debt trap can seem like a herculean task if a borrower is convinced or overconfident about their ability to pay it off; or if they stubbornly continue to live beyond their means. As such management of finances at the personal level becomes paramount, so that advantage of tax deductions may be taken on one hand while keeping a balance between wants and needs on the other.

Mismatched and mismanaged investments suck us deeper into the debt trap unless they’re taken care of. Plus, investments are unlikely to fund the repayment of debts. The interest charged on credit cards and short term loans is too high when compared  with the interest received on investments and bank deposits. It may often be accompanied by fines and penalties. 

Not all debts are bad. A debt that yields revenue on the assets purchased may benefit us in the long run. We tend to  seek financial freedom and hence need to diversify, differentiate and dismember our debts. With limited incomes, rising costs of living and easy availability of instalment credit, tackling such issues has become more difficult. If we default in case of credit cards and loans, our credit rating can be severely impacted. In severe cases, the collateral security may be seized. To save yourself from debt traps, one needs to buckle up using the pointers mentioned below:

Analyse and Assess

The first and basic step is to look back: 

• Take a detailed overview of your open loans, overdrafts or credit card dues. 
• Identifying areas of concern sorts half the issues. Once you know where you are headed and the burden, you may automatically try to cut down expenditures on those areas, while setting aside unnecessary expenses till things take a good turn. 
• Debt trap induces stress that may hamper our performance at the workplace. Prudence and frugality are the best way out. 

Finding appropriate sources

Finance professionals say that people must know whatever they buy is optional and the purchase can be abandoned or postponed as well. 

• For example, education loans might become unnecessary if we value course over the college and hence, opt for the more economical government-aided colleges. 
• Toning down expenses, and trying to work harder to get that pay rise or accruing promotion can also help a lot. We can pool our additional income and saving and go in for debt redressal.  
• Informal modes of borrowing money such as financial help or interest free loans from friends and relatives can help us for paying off debts. Avoiding excessive spending and prioritising needs is the key to financial stability. If we curb personal expenses, it will free up more budget for repayment of loans. 

‘ The trick is to not buy everything someone tells you (that) you can afford.’

-Sullivan

Unchanging mindset that one may always live in debt can be called as the greatest hurdle to interest and debt free life. We can always opt for change. 

Learning the basics

You can always teach and train yourself in financial literature and handling financial hurdles. Money management should be made a top priority. Instead of dividing the available funds equally among your debts, channel them towards high interest loans to ward off further debts. Financial discipline must be adopted and steps can be taken to cover medical risks under insurance. The loan money should always be utilized for serving the purpose for which it is taken. 

Managing existing loans

Consolidation of existing loans and leveraging assets to get more loans at reasonable interest rates sounds feasible enough to be adopted.  Short term loans like those taken for automobiles and durables can be paid off using a loan taken for a longer period. Portals like EarlySalary, in such cases, can prove very useful for borrowers. They also provide loans at lower rates of interest to people who have the ability to pay off the loan but have defaulted in the past.  

Jeet of Rubique says, “As short-term loans come with higher interest compared to long-term loans, you may take long-term loan against property, top-up on your housing loan, and settle your high-cost loans”

Long Term solutions 

Curbing lifestyle expenses is sure to pay in the long run. A drastic change in standard of living and slashing down to essentials is key if you want to get outside the debt trap. Also, increasing the sources of income through collective efforts from family members can be secondary options besides taking up another loan. Use public transport, shift to a smaller house, forego holidays or eating out – these little sacrifices are sure to build up a fund that can help in repayment of loan. 

Prevention is better than cure, they say. Instead of waiting for the fall and getting bound in a debt trap, inform yourself about your financial goals, collect information, manage current resources and avoid overspending. Stretching your legs beyond the blanket is unlikely to help. So stick to the budget, spend thriftly and get out of the debt trap.