5 Ways to avoid falling into a Debt Trap

Here's how to avoid getting into a debt trap.

Everyone aspires to achieve financial freedom. However, achieving this may not always be easy. This does not mean one has to be entirely free of debt. Actually, being totally free of debt would not be a smart move at all. On the contrary, it is advisable to take loans now and then to give yourself a financial advantage.

While it may be wise to take loans from time to time, one must also ensure they make timely repayments to clear them. Smart debt repayments can prevent you from falling into a debt trap. While financial freedom is an aspiration in everybody’s life, the ways to accomplish it may call for some clever moves.

Telling good debt from bad

At the outset, it is important to tell a good debt from a bad one. To understand this better, you may want to classify your debts under two kinds: revenue generating and non-revenue generating. A debt taken to purchase an asset can help generate revenue for you for a long time. This is known as good debt. On the other hand, a loan taken against an asset that does not generate any revenue is known as a bad debt.

Here are five ways to help you get out of the debt trap.

• Identify the issue
  
  Determine the problem and analyse it to identify areas of concern that may or may not be in your control. Subsequently, create a plan that can meet your debt repayments. Here, you may wish to address specific aspects that require your attention and modification. Doing so not only helps you to acknowledge your current predicament but also prepares a clear path for your future. A detailed and meticulous review could be your answer to your current debt problems and help you come closer to a viable solution.

• Prioritise your needs
  
  Having done a thorough analysis, you will now be able to identify essential, semi-essential and non-essential items. Create a priority list to segregate your needs. For instance, if you are in a debt trap, you may want to refrain from purchasing non-essential or luxury items. Semi-essential items, on the other hand, are not critical for survival but add to your comfort. Avoid spending on these if possible, or look for cheaper alternatives. Avoiding non-essential and semi-essential items to facilitate debt repayment is a first step that can have a long-term positive effect on your financial condition.

• Make behavioural changes
  
  To achieve small cost reductions, you may want to make some behavioural changes. For instance, to get out of bad debt, you may want to reduce the frequency of eating out. This ensures cost savings on food, and it can also benefit your health. Preparing a monthly expenditure plan and calculating the extra amount you save by making behavioural changes will help you realise how much you can save over time.

• Consider debt consolidation
  
  Instead of servicing different loans with different interest rates, you may want to consider consolidating your debt under one Personal Loan offered by HDFC Bank. This is an option where you consolidate different loans under a single loan. This can simplify your life and get you out of a debt trap.

Click here to know how to manage your existing loans better

• Build an emergency fund
  
  Saving is a healthy habit. And while it is important to save money, you should also create a special fund to handle emergency expenses. For example, if you meet with an accident and are out of work for a few months, you’ll need money to sustain yourself. With an emergency fund, you can comfortably manage your expenses. An emergency fund can help you navigate tough times without having to fall back on a loan.

Conclusion 

Having a healthy control of your finances can go a long way in achieving financial freedom. Track your income and expenses to determine how your money is being spent. Remember, taking a loan can actually be good for you – it can solve a pressing financial issue. Repaying it on time safeguards you from high-interest rates and helps you meet your financial goals.

Are you looking to apply for personal loan? Click here to get started!

* Terms & conditions apply. Personal Loan disbursal at sole discretion of HDFC Bank Ltd.