How To Get Out Of Debt Traps: Guide to Better Financial Management

One of the reasons why we can’t live comfortably and hardly achieve our financial freedom is because of debts. And once you started borrowing money, it would lead you to more debts. Thus, making your financial situation worse. It becomes a cycle, then you are trap.

What are Debt Traps?

These are circumstances and situations that make it difficult for the borrower to repay their loan. Here are some Debt Traps you need to avoid.

Credit Card

Credit cards may be useful when you need some cash. Yes, there are lots of benefits that we can get from it such as discounts to some restaurants, shopping or even give as free travel, etc. However, if you don’t manage your credit cards wisely, it can worsen your financial situation. Here are the reasons why.

• Annual Fees: Most credit cards have big annual fees for the convenience it is serving. Meanwhile, there are banks offering no annual fees for their credit cards. Choose wisely.
• Late Payment Fees: We need to remember that every bank has different interest rates. Every late payment is subjected to a late fee.
• Cash advance fee: Every company has a different rate, but mostly, they charge from 2%-4% of the amount advanced, with no maximum amount.

Mortgage Refinancing

We all get persuaded when given better options, such as low-interest rates. It is very tempting to refinance our homes. This is usually offered to some people with the best credit quality. But we need to be extra careful of mistakes and traps that could cost us thousands of dollars or even result in our homes being foreclosed.

• Pre-Payment Penalty: Be aware of the contract you are signing. Some companies may include pre-payment penalties in the agreement.
• Risk of Foreclosure: We need to remember that if we cannot pay the amount we borrowed, our house may be at risk of foreclosure. Before signing the contract, be sure that you have the ability to pay it.
• Get Closing Costs Up Front: Until the specific mortgage loan details are not yet clear, the closing cost is just an estimation. As we all know, there are different ways to calculate the closing cost. Lower your expectation or rather expect for the worse.

Car Loan

Car loans are made to secure the payment of cars in the chosen dealer. Banks or lenders approve the amount you can borrow at a given time. Before making any loans, consider the annual interest that you need to pay. Car loans usually have as much as 264% interest rate annually. And if you are unable to pay it on time, there’s a high probability that you will lose your car.

Home Equity Loans

One of the most dangerous and risky loans is a home equity loan. This is a secured loan where your home will be collateral. Meaning, if you can’t pay in the given time, your home will be taken away from you.

Pawnshop Loan

People who need quick cash for short-term payment resort to pawnshop loans. This kind of loan is cheaper and faster than other types of loans. The terms usually range from one to four months and are secured by a piece of property as collateral. If you don’t pay in the agreed period, it will be sold.

Debt Cycle Stages

Overspending/ Low Income

Overspending and Low income are the usual cause of why we are forced to borrow money. Our expenses exceed our income. People at this stage tend to be one-day millionaires, splurging all their money on shopping or things that are not essential. Or people who have low incomes, are not able to budget their money wisely.

Borrowing

At this stage, people are stressed about their finances. They go from one lender to another to borrow money to meet their needs. Lucky, if they borrow money from a friend or family member who is not asking for any interest. Mostly, this kind of person promises to repay their debts on payday or as soon as they have money on hand.

Owe Interest

Loans or debts are paid monthly and with interest. Unfortunately, lending companies give a really high-interest rate that is sometimes hard to pay. Because of that, some people tend to borrow again from other people or lending companies to avoid penalties.

Payback

The stage where people have money to pay their debts. This usually happens on payday. However, because of the high-interest rate that they are paying, income might not suffice their needs bringing us to stage number one.

How To Get Out Of Debt Traps

Acknowledgement

Acknowledging that you have a lot of debts is the first step to getting out of the trap. By doing this, your mind will create an urgency that you need to do something to get out of it.

Track Your Finances

You need to sit down and jot down your income and expenses. You need to understand where your finances are standing. Ask yourself where your money usually goes. In short, you need to track your finances.

Have A Budget Plan

Since you have tracked where your money goes. Which area do you spend most? Which can be cut down? If you have subscriptions, you may unsubscribe from it, if you think it is not necessary to have them. Follow your budget plan.

Conclusion

To get out of debt traps, it’s important to create a budget, prioritize paying off high-interest debt, and consider consolidating debt. Using online finance tools, such as Debt Payoff Assistant or Debt Tracker, can also be helpful in creating a debt repayment plan. If you are struggling to get out of debt on your own, seeking help from a financial advisor or credit counselor can provide additional support and guidance. While it may take time and effort, following these steps and improving your financial management skills can help you take control of your debt and achieve financial freedom.