Debt trap: knowing how to get out of a soaring debt

In some cases, you may be eligible for a moratorium on payments while you get your finances in order.

In a debt spiral, a person is so deeply in debt that they have to borrow even more to pay their contributions. But in doing so, his debt becomes larger and more difficult to repay, keeping him trapped in endless financial misery. Besides stress, loan repayment issues remain on the credit report for years and could make it difficult to obtain new loans when needed.

Let’s take a look at some simple ways to tackle debt spirals.

Positive intention
You need to be sure that you will find a way to pay your dues. This intention is necessary. It is your moral, legal and financial obligation to repay your loans. Late payments, defaults, and settlements (when your bank accepts a one-time partial payment to close the loan) will damage your entire credit history. This will make it difficult for you to apply for new lines of credit in the future.

Lenders will either reject your loan applications or charge you a very high interest rate. Therefore, your intention should be to pay your full membership fee and find solutions to make it happen.

The Psychology of Debt
Debt problems can arise for various reasons such as loss of income or expensive hospitalization. The borrower may also be unable to think through financial decisions, especially understanding the impact of borrowing on their finances. Spirals in debt can also occur for non-financial reasons such as your mental health. For example, a compulsive shopping disorder can cause an obsession with shopping. Whatever the underlying reason for the spiral, it can cause stress, anxiety, and depression, and worsen existing mental health issues in the borrower. It is therefore important to seek professional help. For financial matters, a personal finance advisor may be able to chart a path out of debt. And for mental health issues resulting in financial problems, therapy may be necessary.

Prioritize debts
Assuming you’ve decided to pay off your debt, let’s start by taking stock of your loans. Some loans are bigger than others and you have to pay them off first. For example, high interest debts such as credit card dues need to go quickly because their interest compounds the fastest. Large loans will attract the highest premiums and will need to be paid quickly. For example, a mortgage default can lead to repossession of your home. Create a plan on how you are going to pay off those debts first. You may need to save money or liquidate assets to raise funds.

Consolidate, refinance and restructure
Loan consolidation helps you consolidate multiple loans into one loan whose interest rate and repayment terms may be easier on your finances. For example, you could pay your dues on multiple credit cards through a single personal loan, the interest rate of which may be much lower in comparison and therefore easier to pay.

It is in the best interests of your lender that you pay your premium. Therefore, the lender will give you all their help under their policy to facilitate the repayment. Some options could be refinancing or restructuring your loan. You can refinance at a lower interest rate or restructure the loan to reduce the EMI and extend the term.

In some cases, you may be eligible for a moratorium on payments while you get your finances in order. Either way, keep in mind that late contributions will continue to attract interest, which will increase your contributions. Avoid loan settlements. They can solve a short term problem but create the long term problem of bad credit.

Be smart about new loans
If you’re taking out a new loan to pay off old loans, consider the impact it will have on your finances. You could take out a loan against a security like gold or a property to meet your cash flow needs. You can borrow from your family and friends and apply for a low interest loan. Keep in mind that another unpaid loan could result in forfeiture of your property or harm your relationships with friends and family.

Debt traps are easy to enter and difficult to exit. But with the right approach, borrowers can overcome this challenge.

The author is CEO,

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