A debt trap is a situation wherein you have to take new loans to repay your existing loans. Eventually, you get into a condition wherein the amount of debt you owe gets out of hand. In a debt trap, you owe a massive amount of money to various institutions or individuals. The debts you owe can be offline or online personal loans, or credit card debts.

It is wise to take loans for financial advantage or take small-ticket loans from small loan apps. But the loans taken in an unthoughtful manner can trap you. Once you get into a debt trap, it is complicated to get financially free again. But fortunately, there are a few ways that can completely bail you out of a debt trap.

First of all, understand debt

There is good debt, and then there is a bad one. So, debts can be revenue-generating as well as non-revenue generating. An online personal loan used to buy an asset can help you generate a better lifestyle or revenue. Such debts are known as good debts. 

A loan taken towards a liability does not generate any revenue, which is known as a bad debt. 

But there is a way to study your debt situation and below are the 5 steps you can follow to get out of a debt trap.

5 steps to get out of a debt trap

Here are 5 steps to get out of a debt trap.

1. First of all, perfectly understand your debt

Analyse all your debts and understand their type. For this, you can pay attention to the smallest detail of your debts. After checking for the types of debts that you owe, put down on paper interest rates and total outstanding amounts for each of them. Also, bifurcate bad debts from good ones.

2. Fixate what your priorities are 

After doing a detailed analysis of your debt, make a priority list to differentiate your needs. You may want to cut down on indulging in desired luxuries. You can avoid such purchases in the meantime or find affordable alternatives.

Cutting down your cost is the first step on your path to a long-term positive effect in your life. For example, you may also reduce your monthly expenditures. If one of your debts is from a car loan or bike loan, consider selling your car or bike to pay off the loan. Meanwhile, you can use public transport.

3. Make changes to your lifestyle 

Making changes in your lifestyle is an essential requirement to get scot-free from your debts. Refrain yourself from shopping or eating out. The savings you make by refraining from these regular expenditures would help to improve your finances.

You may even consider making for yourself a monthly expenditure plan at the first of every month. With this budgeting technique, you can easily efficiently save extra cash. 

4. Consider consolidating all your debt with a single loan

One of the most important steps in getting financially free is consolidating your debt. Make a list of all your outstanding debts along with the interest rates against each one. After that, take a single debt consolidation loan to clear all the pending dues. You can now focus on clearing just the one pending loan. 

There are two benefits of taking up a debt consolidation loan: The loan is easier to manage, and the interest rate on such a personal loan is attractive. The interest rate would be desirable to you if one or more of your current loans are credit card debts. You may use small loan apps for taking a debt consolidation loan.

5. Start building your emergency fund

It is essential to build and keep on enhancing an emergency fund to suit inflation. The emergency corpus can be used for any kind of emergencies. Building an emergency fund is critical as you would be able to use it when the need arises instead of instantly borrowing money at compromising interest rates and processing fees for quick access to funds.

Emergency requirements can spur out any time. The urgent medical or other such situation and the kind of funds it demands can be daunting. When you have a dedicated emergency fund in place, hospitalization expenses or any other urgent expenses can be easily paid off by it. 

Also, it is equally important to have a health insurance policy for all your family members. A health plan can prove to be helpful in such situations and help you with an emergency.

Typical features of debt consolidation loans

Debt consolidation is one of the surefire ways to achieve a healthy financial status. Carrying unnecessary loans and prolonged outstanding credit cards lead to financial trouble. This is where debt consolidation loans help. 

With the loan, all your outstanding balances are consolidated into single monthly personal loan EMIs. Debt consolidation loans have the power to make you debt-free. The loan helps you work towards a timeframe to clear all your debts and also help you plan your monthly expenditure.