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5 ways to get out of debt trap

A loan can help you afford a home, education, business, and car, among other goals you could otherwise not finance. However, you could accumulate loans over time or take out high-interest loans that are difficult to manage, causing you to have more debt than you can repay. A debt-trap compromises your financial well-being and results in mental stress, so you should strive to break the debt cycle. Read on for five ways to break free from a debt trap to improve your financial situation.

Table of Contents

1. Take a debt’s stock

The first step to becoming debt-free is taking time to review your finances to identify and organize accurate details of what you owe. Develop a list of all your debts while indicating their interest rates, tenures, and EMIs to determine the most expensive and urgent debts. This will help you develop an effective strategy to settle costly and critical loans to avoid more charges. Check out this Simple Path Financial detailed review for detailed financial guides and tools to help you become debt-free, cut costs, save cash, and boost your financial literacy.

2. Consolidate your loans

It can be challenging to track your debt, especially when you have multiple loans, so you should opt for debt consolidation. Debt consolidation allows you to combine all your loans into one. It entails applying for a personal loan, then using the funds to pay off other debts so that you are only left with a single loan to track. By consolidating your debt, you swap your high-interest loans with a loan with lower interest and EMIs. A personal loan also has favorable payment terms, usually two to seven years.

3. Avoid taking on more loans

When you successfully consolidate your debt, you should avoid applying for more high-interest loans to avoid straining your finances. You should always ensure that all your credit card and EMIs payments do not exceed 40% of your income. This will prevent monetary difficulties if you lose your job or income source.

4. Automate your loan payments

Paying back your loan on time is crucial to relieve yourself of the debt. However, you may spend all your monthly income, especially when struggling to make ends meet, instead of settling the EMIs. For this reason, you should create an ECS mandate with your bank to allow automatic EMIs settlement on a specific date. This will enable you to reduce your debt on the loan tenure. Timely loan repayments also help you avoid delayed payment penalties and interest and hurt your credit score.

5. Request your bank for a loan term extension

Be sure to ask your bank for an extension of your loan terms if you have a home loan. While extending your loan term results in higher interest rates, it is an effective way to reduce your monthly payments and get more time to settle your debt. You could negotiate lower interest rates, especially when you have had a long-term partnership with the financial institution to reduce your debt burden. Moving your loan to a financial institution with better loan terms and lower interest rates can also help you get out of a debt trap.

Endnote

Loans are a life-saver during emergencies, but when mismanaged, they could spiral out of control and lead you to a debt trap. If you are currently in a debt trap, take stock of all your debt, consolidate your loans, avoid applying for more loans, automate your payments, and request a loan term extension to restore your financial freedom.

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