Imagine that you’ve been saving for months for the down payment on your home loan. With enough savings, you jump to invest in your dream property while you are already paying for the EMIs for a car. Months after availing the home loan, you suddenly realize that you’ve accumulated a significant credit card debt you aren’t able to pay. You got caught in a debt trap!
Such an overwhelming and challenging situation not only affects your financial well-being but also causes stress. If you are struggling with mismanaged debts, don’t panic! Being caught in the trap doesn’t mean that your entire financial future is inescapable.
Follow these approaches along with prudent financial planning to get out of a debt trap-
Consider Consolidating Your Debts
If you have several debts, it becomes quite difficult to keep track of all of them. Instead, opt for consolidating all of them into one. It will leave you with just one EMI. This way, you will be able to take out a lower-cost personal loan to pay off the multiple pending debts. It will ease your burden while improving the affordability of your loan.
Avoid Taking Additional Loans
Though it goes without saying, don’t go for any new high-costing loan. Make it a golden rule not to accumulate any kind of debt that can incur a high-interest rate. If you go over a limit, you are only staining your finances and setting yourself for difficulty if you were to lose your income for some time.
Don’t Run After Settlement Too Soon
A fundamental to debt settlement is that the creditors won’t easily show their willingness to settle until you show your inability to pay. Further, if you fall behind of the payments temporarily only, pursuing a debt settlement isn’t a good option. It may have negative consequences on your credit profile, making it difficult for you to apply for future loans.
If this is the case with you, a credit counseling service is worth considering. Or, you can search for short-term hardship plans with a creditor bank.
On the other hand, if you’ve fallen 4-5 months behind the payments, perhaps it’s time to start negotiating with the bank for the best settlement.
Approach Your Bank For Restructuring Your Loan
Banks or lending institutions are there to understand your liabilities and help you out in tough situations. You can approach your bank to make your loan more affordable and help you get out of the debt trap. Banks can extend the tenure of your loan, thus reducing your EMI payments. Once you’ve cleared out of the debt trap, you can boost your EMI payments again.
Find Ways To Increase Your Income
Try to secure a second job to earn additional income. Here, the idea is to allocate secondary income towards debts to settle them quickly. You can find a plethora of ways to earn income. Find the one relevant to your skills, background, and knowledge.
Formulate A Budget And Stick To It
After you have accumulated the list of your debts, decide how you will pay them back. Getting out of the debt trap is your financial property at this moment. So, fix a budget and stick to it. Make sure to cut down on any unnecessary expenses.
Keep Track Of Your Credit Scores
Good credit scores are the sign of a good borrower. Nowadays, the best loans are reserved for those who have a credit score of 700 or more. If the credit score is below this limit, ascertain genuine reasons for it. Late payments, default, or loan settlements may be the reason for this. After the closure of a loan account, check your credit report to ensure that all the details are as expected.
Besides, it is crucial to believe that there is always a way to get out of the debt-trap situation. Though it may take some time, creating a plan and sticking to it can help you get out of the trouble easily.