A person’s spending and saving habits would usually determine their overall financial health. However, when connecting the dots, you could quickly determine that there could be more to debt than meets the eye. It might just take a little bit of common sense and also the will power to avoid falling into a debt trap and choose to spend in moderation. In this post we explain the debt trap and tips on how to avoid it when borrowing.
Here’s a great primer video we found on how to avoid the debt trap:
Personal Loans – Good Debt vs. Bad Debt
A person can be well-educated and yet may lack financial literacy or focus on their economic priorities. It can be tempting to splurge or spend on unnecessary luxuries and end up borrowing money due to lack of funds. Borrowing money or taking out a personal loan can be used for different purposes such as paying bills, medical expenses, grocery or food expenses, or even for paying off another debt.
Social media and e-commerce platforms have taken advertising into an entirely new era; it has accelerated every consumer’s drive to purchase on impulse in just a few clicks or without even thinking if they can really afford it. “Spending within your means” has been a cliché that has become very difficult to follow through for a new generation of consumers.
Not all debts are created equal though. There is such a thing as a good debt and a bad debt. The numbers speak for themselves.
Good Debt
When you use a debt for funding a business expansion or for purchasing additional equipment and stocks then that is considered as good debt. If you earn or accrue profit over time from a personal loan then that is a good kind of debt because it is considered as a working capital and investment for business. It does not become a dead end for your money. It becomes an asset or additional investment.
Bad Debt
When you use debt to throw a grandiose party then that is considered a bad debt. If you tend to borrow money just to splurge or spend on things you don’t really need like the latest phone model or car then that is considered a bad debt as it becomes a liability rather than letting your money work for you.
Signs That You Are Falling Into A Debt Trap
Debt can be a vicious cycle. It can even be addictive for some people who have been habitually spending lavishly on credit cards or taking out payday loans and personal loans over and over again; without any direction. Experts say that if you have been borrowing money for more than three times a year then that is a telltale sign of a debt trap. Here are the red flags or warning signs that you are seriously falling into a debt trap:
You borrow money even for regular expenses
Borrowing money or taking out personal loans should be intended as a buffer for medical emergencies in case of sickness or accidents, delays in payout, or for loss of job. However, if you borrow money or get personal loans even for routine expenses like paying the bills, rent, food and transportation, and educational expenses then you might want to reevaluate your spending habits. This becomes like an “a-ha” moment for you right there which gives you clarity on your credit or financial standing at present.
You spend more than 50% of your monthly income on sale or discount items
If you are the type of shopper who would always be on the lookout for flash sales on malls or online shopping sites then you are finding yourself on a dangerous downward slope towards a debt trap. Compulsive buying or reckless spending can put a serious strain on your finances. These advertising stunts are geared to dangle the carrot or strategically target consumers who can’t restrain themselves when shopping. This can put a huge disparity on your bank accounts and can ruin your entire budget.
Banks and Financial Institutions are rejecting your loan applications
Your credit score or current financial status would reflect on credit approval. Banks and private lenders or loan institutions would usually do a quick and thorough check of your credit standing and decide based on your repayment ability. If you end up getting rejected by every lender or bank for a personal loan then this screams bad or negative credit standing for you.
Ways to Avoid The Debt Trap NOW!
Sliding into a debt trap can be deadly so the best way to avoid this is to check your spending and income. You can’t pay off a debt with another debt especially if you have one too many to cover for everything. If you do this all the time, then this is a surefire road to financial rut. Here are the ways to avoid debt trap that you can do today:
Focus on good debt
If you are to borrow or take out personal loans, then it should be tied up to a good debt. Get a loan to finance a business or as a rolling capital. This is a solid way to avoid the debt trap and slowly clear your outstanding loans.
Use credit cards sparingly
It takes a great amount of discipline to manage credit card spending. Some people just pay the minimum credit amount and with the interest accruing every month, you are bound to fail with your debt management. Avoid making cash advances on your credit cards and make sure to pay up in full immediately to avoid the rolling interest.
Lifestyle makeover
Adjusting your lifestyle in the effort to reduce expenses could be painful yet necessary process to make ends meet and also avoid falling into a debt trap. This is a long-term solution that can help you achieve financial stability and avoid sinking your own ship with incredulous debt.
Take a zero-interest personal loan from family members or friends
Asking help from immediate family or close friends can provide you a better chance or leverage at paying off most of your debt or even starting a new income stream thru investments. Opening up to your family members about your financial dilemma can help provide you easy repayments options for your outstanding loans.
Final Thoughts
You can always turn the tables around when you are knee-deep in debt. Avoiding the debt trap when borrowing is easy if you are determined to get out of financial limbo. All it takes is financial discipline and a lifestyle modification so you can turn your ‘expense knob’ off while you accelerate your savings and investments over the long term.
