5 Ways To Get Out Of A Debt Trap

Today when we are faced with endless materialistic temptations, it is easy to give in to them and only later realise the debt trap that we are in. It could probably be more than a few shopping sprees before you realise the debt pool in which you find yourself. However, as they say, realisation is the first step to resolving any situation. Now, that you probably know you are in a precarious financial situation, use the below steps to get out of a debt trap.

1. List all your debt details

If you find yourself surrounded in a debt trap, in all likelihood you are paying off multiple loans at different stages and moving around like a zombie or a headless chicken with no sense of direction. The first thing that you need to do to dig yourself out is to list down all your loans. Also list down, the rate of interest, the monthly payment or EMI, number of remaining months, the balance outstanding as well as the repayment terms. For instance home loans will not charge you for part payment or closing the loan prematurely; whereas most other loan providers will have a fees like 5% of the principal being paid to make up for the interest that you would not be paying.

2. Consider debt consolidation

With new and complicated products which are often mis-sold to us, you could suddenly find yourself in a situation where you are paying out multiple loans of 30%+. This could be pay day loans or simply revolving credit card bills. In case you realise that there are a lot of such loans with a high interest component yet to be paid out, you could consider debt consolidation by taking on a loan with a much lesser rate of interest. Today, personal loans can be easily availed in a range of 12-18% leading to lower EMIs and more easily payable loans. With debt consolidation, since you will also see one loan amount, you will be able to track it better than multiple disparate loans with varied interest rates.

3. Pay more than EMI every month

If you have come to the conclusion that you are at a financial edge, then you need to decide to pay more than your regular EMI every month. If you continue to pay the same EMI which could extend for years and realise a new need for funds, you would only end up with more debt on your head. To improve your financial situation, choose to put in as much money as you can to closing the multiple loans that you might be grappling with. 

4. Decide which loan to pay off first

Once you decide to aggressively bring down or pay off your loans, you need to decide on your focus areas. Spreading yourself too thin by putting in some extra money towards each loan will only serve to dilute your efforts. There are two main established methods – debt snowball and the debt avalanche. Debt snowball is a method popularised by money guru Dave Ramsey and plays on the psychology of small wins. The idea is to put in as much extra funds as possible to pay off loans with lower outstanding balance so that you can start a domino effect of making easy kills. Once you close off one loan, you use that EMI and the extra funds to start off with the second highest outstanding loan. On the other hand, with debt avalanche you target the loan with highest rate of interest first. Once you start paying that off, you are averting the cost of borrowing in a much better manner. While debt snowball vs debt avalanche is a continued debate, if you are looking for a psychological booster try the debt snowball method whereas to reduce paying more for your incurred loans, debt avalanche will work better.

5. Start a side hustle

Are you reading this article and wondering – “what extra money”? I hear you. Today most of us live pay check to pay check, struggling to get past the last few days of a month and the thought of paying more than EMI on a loan sounds next to impossible. However, there are two ways of doing this – you can either reduce your spend or increase your income. A lot of us get so caught up in our day to day lives that we don’t see the possibility of optimally utilising time to earn some extra cash on the side. However, side hustles (as they are popularly called) are becoming a big deal in the US. If you believe this is an important enough goal for you, make the time and check out this list of 99 ideas to get you started.

When faced with a situation of paying off multiple loans, when you don’t even remember getting into them, things can seem dismal. Breaking things down into tiny steps will slowly but surely get you out of such a debt trap.