In this guide, we will show you how to get out of debt by using a personal loan smartly.
Being trapped in a cycle of debt can be overwhelming and stressful. If you are struggling to make ends meet and find yourself drowning in multiple high-interest debts, applying for a personal loan could be a viable solution to help you. This will help you consolidate all your existing debts into one debt. But first, let us understand debt traps.
What is a Debt Trap?
A debt trap is a vicious cycle of debt that you might get into if you have taken on multiple loans. Over time, the monthly EMIs on these loans might make up a very sizeable part of your monthly income. After paying off these EMIs, you may not have enough money left over to meet your fixed financial obligations, such as rent, electricity, etc. Therefore, you might be compelled to take out another loan to make these payments. This will increase your EMI payments even further moving forward. Not just that, but it is also likely to reduce your credit score (because of your high debt-to-income ratio), making it difficult to get further loans at favourable terms.
As you can see, if you don’t deal with debt traps smartly, it could lead to an out-of-control downward spiral in your financial situation.
Below are some of the common reasons that people fall into a debt trap.
- Your EMI payments make up more than 50% of your monthly salary.
- Your fixed monthly obligations (rent, utilities, etc.) make up 70% or more of your monthly income.
- You have reached the maximum limit on any of your credit cards.
- You have taken out multiple loans.
- You are unable to save any money due to your financial obligations.
If you are plagued by a debt trap, you should consider getting a personal loan for debt consolidation.
How a personal loan can help through debt consolidation
By taking out a personal loan, you can pay off multiple outstanding debts, thereby eliminating the need to keep track of multiple payment deadlines and make multiple payments each month. This is known as debt consolidation, and it is a highly efficient way to start improving your financial situation.
However, keep in mind that what got you into the debt trap in the first place cannot be allowed to happen again. Getting a personal loan is just a means to an end, but the end goal for you has to be to curb pointless and impulsive expenditures. Moving forward, after paying off your current debt, you must only take on debt that you can comfortably afford to pay off each month. Try to avoid getting into situations (mentioned above) that could lead you into a debt trap.
Having said that, getting a personal loan for debt consolidation will help you in the following ways:
Pay off multiple debts in a single stroke
Use the funds from your personal loan to pay off as much of your existing debt as possible, especially the ones with the highest interest costs, like credit cards, payday loans, etc. The interest savings from these alone can add up to a significant amount. The money saved from such high-interest debt needs to now be channeled towards paying off any remaining debt faster than was possible before getting the personal loan.
Make a Single Monthly Payment
After paying off all your current debts, you no longer need to worry about monthly deadlines for multiple loans. You won’t need to make multiple payments to different lenders either. This means there is almost no chance of forgetting to make a payment, thereby incurring penalties for late or non-payment. This can bring you peace of mind.
You can get a personal loan at a low interest rate and with a flexible repayment schedule from LoanTap. This allows you to make monthly payments that you are comfortable making without impacting your other obligations.
By leveraging the power of personal loans, you can find your way out of the daunting debt trap you may be caught in. Consolidating multiple debts into a single loan not only simplifies the repayment process but also provides an opportunity to secure more favourable terms, such as lower interest rates. However, it is important to approach this solution with caution and discipline. Developing a solid budget, committing to consistent payments, and addressing the root causes of the debt trap are essential steps towards achieving long-term financial stability. With careful planning and responsible financial management, a personal loan can become a valuable tool for escaping the grip of debt and paving the way towards a brighter financial future.