Breaking Bad : How to liberate yourself from a potential Debt trap

Falling in a Debt trap is often a slow and gradual slide that can become more and more dangerous as it goes unnoticed till the person is neck-deep in debt and out of options. As a young and aspiring country, most people are looking for meeting their needs, and at times needs which are beyond their available means. Debt comes as a means to meet such needs, however borrowing beyond having a plan/an idea of paying back such future liabilities may end up creating stressful life.

This article is a small step towards addressing most common questions on how a trap gets created and how it can be avoided or addressed.

Here are some stereotype causes which can lead you into a Debt Trap:

1. Payday Loans

Payday loan seekers are more likely to be people with little-to-no financial literacy, and most vulnerable to fall into this trap. PayDay Loans are Ultra short duration loans (ranging from 7 days to 30 days), which are designed to meet your consumption needs that you can not meet from your own income. Most people avail such loans because they are easy and quick and of small amounts. What most people also forget is that it is at an extremely high rate of interest (in some cases it is at an 100%+ annualized rate) and have non-transparent pricing (which can be devastating for customer’s credit profile if unpaid)

And, then some people fall into the habit of paying First Payday loan with another payday loan and the chain continues, where they end up at times taking 10 or more small payday loans within a month.

Our advice: Avoid such ultra-short duration loans like 30 days or less and borrow for a longer duration depending on loan paying capability. Take what you really need.

The shorter you borrow, you actually end up paying a higher amount on account of transaction costs.

 2. Start Reducing your Debt if you are at 70% or higher debt

If you Monthly EMI outgo is 70% of your Net In Hand Salary or Income, then it's time you should start reducing your debt. For most Salaried people it may not be possible to increase their income mid of the year, however you can check your unwanted spends (like food, travel, movies etc) to keep a check on your debt.

Our advice: Borrow some money from your parents, or siblings and reduce it immediately, rather than ending up in a worse situation later.

3. Converting Credit Card Spends to Long term loans

If you overspent for a few months on account of family/personal reasons, you should look at converting your Credit Card Bill into a Personal Loan for duration which suits you (like 6-12 months or more). It's always better to keep your repayment history sound rather than defaulting on Credit cards, which adversely impacts your Credit Score (CIBIL etc)

Our advice: Take a Personal loan from Mystro or other, and repay your credit card bill. You may avoid converting your Credit Card bill to EMIs with the Credit card company, as it is still costlier compared to most personal loans in the market.

4. Refinance High Cost Debt with Low Cost, not the reverse

Many customers do not realise what the cost of their loan is. Compare it based on Reducing Rate of Interest Annually (as most Banks quote the same). Compare Apples against Apples and not Orange. Do not compare a Reducing Rate to a flat rate. These are two different ways of computing a rate of interest. Ask your Loan company to convert and inform you.

Once you know that, start looking to explore if you can refinance your existing loan by some other Loan Company which can provide you at a lower cost.

Our Advise: Be well advised and do not rush for availing a loan. Take it from reputed and domestic players who have the best interest of customers and value transparency. Else, you may end up in regretting such short-sightedness.