Debt trap is a never-ending situation where you take loans on top of loans to pay off the existing ones. Over time, this spiral can zoom out of control to the point you exceed your repayment capacity.
Sit down and list out all the existing loans. This will help determine which loans create a hole in your pocket the most. Make a list of necessary monthly expenses and calculate total cost to understand how much you can practically afford to repay every month.
Cut down unnecessary expenses. Control yourself from impulsively purchasing. This is a crucial money-saving tip as it will reduce unwanted expenses, leaving more money to repay loans.
If you want to tackle one debt at a time, try to prioritise them by keeping the most expensive loan, which has the highest interest rates, at the top.
If you have already reached your maximum borrowing capacity, it’s time to stop taking more debt. Another thing to keep in mind is to maintain the debt-to-income ratio below 40%.
Debt consolidation is when you combine all your loans into one new loan with a favourable tenure, interest rate, EMI, etc. So, you simply merge them into a single payment and lender with a lower interest rate. This method helps you pay your EMIs on time, save on interest rates, get your debt paid off faster.
The better your scores are, the more choices you get in selecting the best lender with lower interest rates and the most comfortable loan terms. So, keep checking your credit score after every loan closure or once in three months.