Debt Consolidation: How To Avoid Falling In A Debt Trap?

debt consolidation

Being in debt is like living under a dark cloud. Getting out of debt isn’t easy. Sometimes it takes all you have to keep up with monthly expenses and save for a rainy day. But if you only make the minimum payments to your creditors, you risk getting trapped in debt, and it could take several months or years to come out of such a situation.

Fortunately, there are plenty of ways to get out of debt. Let us understand what a debt trap is and how you can avoid falling into such a trap and how debt consolidation can help us.

Save Money So That You Don’t Fall Into A Debt Trap

What Is A Debt Trap?

What is your main responsibility when you borrow money? You agree that repaying the debt should be your first goal. As a result, it shouldn’t be an issue if you use your own resources to do it. But what if you cannot? There are only two options left for you. One is that you default on the loan repayment. Secondly, in order to pay off the previous debt, you acquire a new loan. The second choice is surprisingly riskier.

While the first choice forces you into default, the second one traps you in debt. As a result, we define a debt trap as an instance in which you take out a loan in order to pay off a previous loan obligation.

For instance, you must pay the installment on your home loan that is due this month. You do not have money. So, to pay your loan installment, you swipe your credit card and obtain a card advance. If it is only a temporary arrangement, there shouldn’t be any issues. But if it happens frequently, it may take on deadly proportions. Please be aware that you are taking out a loan with a 36% annual interest rate to pay back a loan installment with a 7% annual interest rate. In such a situation, you are raising your credit card liability while decreasing your house loan liability. So, consolidating your debts may be a good option in this circumstance.

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What is Debt Consolidation?

Debt Consolidation means you consolidate all your loan liabilities in a single place, making it easy for you to repay your installments.

Consolidating your debts can therefore help you and free you from a debt cycle. Many banks today provide debt consolidation services to both current customers and potential customers. You shouldn’t, however, proceed with debt consolidation haphazardly without taking a few important factors into account.

  • Preferably, your overall debt situation shouldn’t change. Otherwise, you risk falling into a debt trap once more.
  • Preferably, the new debt’s entire duration shouldn’t be longer than the previous loan. If you don’t, you pay off your obligations more slowly and over longer periods of time than you otherwise would have.
  • The new loan’s interest rate ought to be lower than what you currently pay.

The Money Club -A Solution to Come Out of Your Debt Trap

Sometimes, despite your best efforts, you will still find yourself short of money for unnecessary/unforeseen expenses. In such a scenario, investing in a chit fund is just what you need. Chit fund is a borrowing cum saving tool where a certain number of people come together and pool money. It helps clear all your outstanding balances and helps you to convert your multiple payments into a single monthly payment. Our entire process is quick and completely online. You just need to download The Money Club app from Google Play, complete your profile, and relax.

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Listed below are a few reasons why you should consider consolidating your debts by taking part in The Money Club chit fund scheme:

  1. Single EMI Payment: Keeping track of several EMI payments might be challenging at times. You could incur penalties and have your credit score lower if you fail to make any of your EMI payments on time. You might combine your debts with a chit fund to prevent these issues. By doing this, you’ll be able to pay off your debt more easily as you’ll only have one payment to make each month.
  2. Lower Interest Rate: You can discover that the interest rate on the money financed by a chit fund is less than the present interest rates you pay. A sensible solution in these situations is to borrow money from a chit fund to consolidate debt.
  3. Quick Disbursal: As soon as the bidding is finished, the lump sum amount you require will be transferred to your bank account.
  4. No Collateral or Security: If you borrow money from a chit fund, you are not required to provide any collateral or security.
  5. Flexibility: You can choose any payback term between 1 and 5 years, depending on your ability to repay, when you obtain money for debt consolidation using chit funds. You can also choose a chit amount that will cover all of your debts.

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How To Avoid Falling In A Debt Trap

It can be quite hard to focus and save consciously, especially if you already have debt. But don’t worry – we bring you 6 tips to better manage your finances and not fall into the debt trap.

1.Create a Budget and Follow It

Your ability to save money and put money toward monthly costs depends on how much you’re spending on paying off debt. You must therefore make a budget and keep track of all your costs. Your ability to comprehend where your hard-earned money is going and cut out wasteful expenses will improve. As each budget is unique, you must take into account both your monthly income and your necessary expenses. How much you save should depend on your long-term financial objectives. A budget will assist you free up money that you may use to pay down your debt. In this manner, you will speed up their repayment.

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2.Use Credit Cards Only During Emergencies

Let’s say you already pay monthly installments on loans for your education or property. In that scenario, you must take every precaution to avoid taking on more debt. This includes credit cards, which are among the priciest methods of borrowing money. Unbelievably, the average annual percentage rate (APR) for credit cards is around 41%. This interest rate may be misrepresented as a monthly value by some banks that divide it by 12 and display it that way. The availability of quick personal loans online is a better alternative because, provided your credit score is high, you can acquire an annual interest rate as low as 11% on them. However, only use a credit card in an absolute emergency when there is no other way to pay. Also, ensure that you pay your credit card bills on time to avoid late payment penalties later on.

3. Opt For Credit Card Balance Transfer

You could opt for credit card balance transfer to a new credit card with a lower rate of interest, which is often a promotional interest rate. However, you should only opt for this if there is a high interest difference and if you can pay off the dues within the promotional period.

4. Increase Your Loan Tenure

You must keep track of the entire various loan EMIs you are paying each month in addition to controlling your expenses with the aid of a budget. While timely EMI payments are a wonderful thing, they shouldn’t reduce your monthly savings. What if unexpected costs arise next month? At no point should the sum of all your loan or debt EMI payments exceed 50% of your monthly salary. If so, it can significantly impair your capacity to save money and control your monthly costs. Increase your loan tenure if you are spending more than half of your income only on debt to relieve the stress of your monthly EMIs. This will help you save money and offer you some breathing room.

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5.Pay Off Large Debts First

You may occasionally feel overpowered and anxious by the thought of paying off all of your debt. Remind yourself that while it might be difficult, it’s still doable when something happens. The biggest debt you have to pay off first can be the first step. Spend as much as you are able to on it so that you can pay it off more quickly. Pay the very minimum amount due on all of your other payments to keep servicing them as well. Once your most expensive loan is paid off, go after the next one and use the same strategy. Your debts will be successfully paid off before you know it!

6. Increase Your Income

One of the ways to reduce your debt is by increasing your income by taking on online freelance jobs from home that are relevant to your skills, knowledge and experience so that you can pay off your debt faster. Getting a second job, even if it’s just a few hours a week, can be a pain, but it will be time well spent and money earned.

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