Debt trap will always be an issue as long as loan systems are prevalent. And since loan systems are rooted in the very core functionalities of our society, debt traps and irresponsible borrowing is always going to exist.
In fact, Aussie millennials have racked up colossal amounts of debt, with the average personal debt value reaching over AUD 56,800.
Therefore, what needs to be done to avoid this gradual debt accumulation? How to avoid a debt trap or get out of one? How can a debt consolidation loan help? Read on to find out!
What are the common reasons behind a debt trap?
Before we head on to the common reasons behind a debt trap trigger, you need to understand what a debt trap is. In essence, a debt trap is where you lose track of your debts and spiral down a pit of cumulative debt.
This usually happens when you spend more than you currently earn, or have saved up. The most common reasons responsible for one ending up in a debt trap are as follows:
- Low income or loss of income
- Next to nothing in terms of savings
- Using up all your future money
- Bad budgeting
- Education costs
- Extravagant lifestyle
- Unexpected emergency
How to keep away from a debt trap?
You might need access to emergency funds at a point in your life, and if you don’t have much saved up, loans are the way to go. Although, the inability to repay instalments on time can land you in a debt trap.
What can you do to mitigate this issue? Read on!
Identify the root cause of the debt trap first
Before jumping to conclusions or panicking, first identify the root cause of the debt trap. Only then can you proceed to mitigate it. This includes checking your bills, expenses, credit card statements, etc., in order to figure out where a significant part of your income is being directed to.
Prioritize your needs
Avail of debt only if you can pay it off. So if you are obtaining credit on your card, you have to arrange the repayment funds by the due date. Prioritize your needs and spend only as much as you can afford. Limit your credit card spending if you feel you aren’t earning enough.
Have a repayment plan in place before you borrow
Leveraging an EMI calculator will always be effective while formulating a repayment plan. Therefore, make sure you have one in place before you avail of a loan.
Consolidate your loans
If you have multiple debts to be paid off to multiple lenders over mixed tenures, it is always a good idea to consolidate your loans. By pooling them all under the same loan, you can pay off the loan amount and interest charges at once and pay a single lender at a fixed time every month. Availing of a debt consolidation loan is going to make keeping tabs on your loan instalments considerably easier.
A debt consolidation loan is one of the best alternatives to paying off all your distributed debt at once. Paying off so many lenders simultaneously can be challenging to keep track of, ergo, the need for these loans.
Apply only for loan amounts that you can afford to pay back, and keep building a good credit rating by paying off your dues on time.