Managing your finances efficiently implies that you have to try and keep your monthly expenses low. However, due to the easy availability of a personal loan and instant credit, most people get distracted. In case, you feel that your current financial situation is overpowering you, then you might as well want to check for debt trap signs. Wondering what the debt trap signs are? Keep reading.
Let us begin by understanding what is a debt trap?
As the name suggests, a debt trap is a situation wherein it becomes difficult for an individual to repay the loan amount. This happens mainly because of the high-interest payments which prevent them from repaying the principal amount. Being trapped in debt is not something you would desire. Not only it takes a toll on your finances but makes it difficult for you to avail any loan in the near future.
Following are 5 signs indicating that you are falling in a debt trap:
Monthly Installments Exceed 50% of Your Income
You Have No Savings
Making Minimum Credit Bill Payments
Loan to Repay a Loan
When Banks Refuse Your Loan Application
1: Monthly Installments Exceed 50% of Your Income
Do not fall victim to easy EMIs, discounts, and sales. Spending compulsively can take a toll on your finances and push you more towards a debt trap.
Every month there is a sale put on different items. Most people cannot control themselves and end up purchasing things on EMIs. Even though you think that these EMI amounts are not that huge, when you add the various EMI obligations, you end up having little to no money for your other necessities.
2: You Have No Savings
To have a financially secure future, it is important to have multiple investments and savings. But if you happen to save no money from your monthly income, then you might be in trouble.
Continuing this habit will keep you from building your wealth. Eventually, you may not be able to achieve your financial or life goals such as buying your own house, starting a business venture or planning your dream wedding.
Moreover, to meet your financial needs, you will be forced to borrow money from banks and other sources. This thus increases your chances of falling into a debt trap.
3: Making Minimum Credit Bill Payments
Paying only the minimum credit bill is a sign that you are in a debt trap. The minimum amount due is usually the interest amount on your spending. It is required to be paid for a particular bill cycle in case you are unable to clear the entire outstanding amount at one go.
It is however noteworthy that even if you clear 90% of your credit card bill, banks will charge interest on the entire amount in the next bill cycle and not on the 10% outstanding. Hence, it is highly advisable to clear the entire credit bill in one go.
4: Loan to Repay a Loan
If you happen to take a loan for repaying another loan amount, it only means that you are falling into a debt trap. Most people consider doing this, thinking that they will be able to handle the finances in the coming month. However, know that this will only lead you more into debt and not get you out of it.
5: When Banks Refuse Your Loan Application
Usually, banks reject loan applications of people with a poor credit score. Although the acceptable credit score ranges from 300 to 900, only scores more than 750 are considered good by the banking institutes. So, if a bank rejects your loan application because of your poor credit score, know that you are in a debt trap.
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