A debt trap arises when you’re forced to take new loans to repay existing ones, meaning your financial obligations outweigh your ability to pay. It may be caused by your EMIs exceeding half of your income, fixed expenses being more than your earnings, or exceeding your credit limit.
Debt traps may also be due to taking up multiple loans or a lack of a debt repayment strategy. Nevertheless, an effective plan and the proper techniques can help free you from debt. This post discusses five smart ways to get out of debt.
1.Leverage debt review
Debt review or debt counseling is an excellent way for over-indebted consumers to get out of debt. When you apply for debt review, and you’re found over-indebted, you’re placed under debt counseling. You may wonder, what is a debt review? It involves handing your debt negotiations over to a debt counselor to negotiate with creditors on your behalf.
A debt review lowers your monthly repayments, making it easier to keep up with them while ensuring you can afford basic living expenses. It also safeguards your assets and property from repossession, ensures you only have to deal with a single consolidated amount, and doesn’t get blacklisted. Through debt review, you can get a structured strategy to help you towards your financial freedom.
2.Opt for debt consolidation
Juggling several debts simultaneously can be a struggle. However, consolidating those debts into one can help. Debt consolidation involves taking out a new loan to repay multiple existing debts, usually at a lower interest rate. Based on your new loan terms, consolidating your debt can help get you a reduced monthly payment, boost your credit score, repay your debt sooner, and ease your financial situation.
Managing multiple accounts and due dates can be challenging to budget. It also increases the risk of missing a payment, resulting in late repayment charges while negatively impacting your credit score. Nonetheless, consolidating your debts simplifies your monthly budget and ensures timely repayments. Debt consolidation might not be the best solution if you have a low credit score or a lender offers you an APR less than you already pay.
3.Create a budget
Developing a budget can help you pay off your debts quicker. An excellent budgeting strategy for debt repayment depends on your financial situation. When making a debt repayment budget, determine the debts to prioritize because not all debts are bad. You can first pay off secured debts, payday loans, personal loans with unfavorable conditions, and rotating, high-interest credit card debts.
Upon identifying the debts you want to prioritize, choose a budgeting strategy to attain your goals, including spreadsheet, zero-based, debt avalanche, debt snowball, or the 50-30-20 budgeting method. Assess your expenses and income and budget accordingly.
4.Avoid taking out more loans
Taking out new loans when looking to free yourself from debt can be detrimental. Avoid applying for fresh loans because this will accumulate and sink you deeper into debt.
5.Manage your expenses well
Finding a way to manage your expenses better ensures you have more to direct to your debts. Ensure your income is more than expenses. Eliminate regular expenditures that won’t affect your life and adjust your lifestyle where necessary. This will help you save more money to help clear your debts sooner.
Endnote
Debt traps can take a toll on your mental and financial health. Implementing these tips can help you get out of a debt trap.
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