Debt Trap: What Causes it, and How to Get out of It

Not all debts are bad. Some are necessary for your growth. But if you take debts to finance a more expensive lifestyle, then that is not a good practice. Getting used to these types of facilities can worsen your financial situation as you are left with borrowing to pay off some debts. The worst possible effect of excessive borrowing is called a debt trap.  

One way to avoid sliding into a debt trap is to avoid those expensive loans. If you must take a payday advance, make sure you shop for the cheapest loans. PayAid, for example, is a loan facility available to Kiwis that doesn’t charge interest or late penalties. The only cost associated with the loan is a 5% fee on the amount you take out. In this article, we highlight the signs that you are sliding dangerously into a debt trap. Keep reading to learn more. 

Things that May Drive You into a Debt Trap

Whether salaried or self-employed, we all tend to have unexpected situations that may force us to seek loans. But sometimes, we get into a vicious cycle of debts out of careless financial behaviors. They include the following:

• Careless credit usage

Many of us see a personal loan as a solution for meeting our needs. However, easy credit can very well turn your finances upside down. While using a credit card is easy for most people, they can easily lose track of how much they are spending. Since credit card transactions don’t involve the use of cash, they can significantly increase your spending. 

• Lack of a special fund for emergencies

Unexpected events like losing your job or a medical emergency can lead to borrowing beyond what you are capable of repaying. These situations, for most people, are the beginning of getting into a debt trap. The best way to avoid these financial emergencies is to create a contingency or emergency fund. 

But if you understand it is a debt that you need to pay back, getting out of it isn’t an insurmountable task. However, most people get into debt traps because they gradually slide into them without noticing. It is a dangerous situation because you will not realize you are in trouble until when you are in the abyss of debt. That is why you need to know the signs of going into a debt trap and stop it before it is too late. Before are some of the telltale signs that you are sliding into a debt trap. 

Signs that you are Sliding into a Debt Trap

• Borrowing to meet regular expenses

If you cannot meet your normal expenses without borrowing, then you should watch out as you are fast getting into a debt trap. Normally, you should be able expenses like rent and your children’s fees without taking out a payday advance. Such emergency loans should only be taken for contingency purposes. 

• You Don’t Pay Your Credit Card Bills in Full 

It’s usually the first sign that you are getting into a debt trap, but sadly many people don’t realize it. You will find that you pay the credit card company a minimum amount to roll it over. This amount only covers the interest component of the bill. Paying only the interest every time the loan is due can make it impossible for you to clear your loan. Credit card companies charge up to 40% in interest annually which makes it incredibly hard to pay off such a big debt. Another thing you need to understand is that banks charge interest on the whole credit card bill. This means that, even if you clear 90% of the credit card amount in one cycle, the bank will not charge you the interest on the remaining 10% but the entire credit. That is why we advise striving to clear the amount in its entirety in one month and not a minimum figure each month. 

That is why we advise Kiwis to avoid these expensive loans at all costs. Instead, take a PayAidloan that doesn’t attract interest or late penalty charges.

• You Have to Take a Loan to Pay Your Debts. 

If you find that you have to take a personal loan to settle your credit card bill, for example, your financial trajectory has taken a dangerous path. 

• Your total EMIs exceed 50% of your income in a month

Unplanned spending as a result of schemes such as offers, discounts, and easy EMIs can hurt your financial life and put you on a course for a debt trap. Even where the standalone EMIs are considerably small, they still leave you with little cash to meet your monthly expenses. If you find that paying off EMIs gobbles more than 50% of your income, this is a clear sign that you are hurtling towards a debt trap. 

• Your monthly fixed expenditures are greater than 50% of your income

Other than the EMIS, you could also be faced with several other regular expenses like utility bills, kids’ fees, rent, food, etc. if the sum of all these obligations exceeds 50% of your income, it signals a dire financial strait that might lead you to a debt trap. 

• You turn to your savings to help meet your monthly expenses

If you must raid your contingency fund, or have to touch your retirement fund or children’s education account to finance your regular expenses, then this is a worrying sign. It shows that you are spending way more than you earn and this is dangerous behavior. The danger is that, should you find yourself in an emergency like a job loss or an unexpected medical situation, you will naturally get into a debt trap.  

Conclusion

When we are faced with financial difficulties, the only option for us is to borrow. And, while borrowing once in a while is not a horrible thing, developing a habit of it is. The worst thing that can happen is that you get into a debt trap that you cannot free yourself from. The good news is that a debt trap doesn’t just happen overnight. Before you get deep into it, there are usually telltale signs. Knowing these signs will help you to act and avoid getting into a debt trap. Also, replacing those expensive loans with a payday advance like PayAid will go a long way in helping you steer clear of financial troubles.