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Debt Trap - How to get Out

What is Debt ?

Debt mean a loan, a liability that you need to pay legally, no matter whether you have the resources to pay it or not.
Debt, when managed prudently, can help you accomplish your financial goals and satisfy your needs. That said, one small misstep and you can quickly find yourself trapped under mounting debt. In addition to causing you loads of financial stress, overwhelming debt can also significantly affect your mental health. Such high levels of debt are what most financial experts call a ‘debt trap.’ 


What is meant by a debt trap?

Technically, a debt trap is a situation where you’re forced to take fresh loans to repay your existing debt obligations. And before you know it, you get stuck in a situation where the amount of debt that you owe takes a turn for the worse and spirals out of control. Such a situation typically arises when your debt obligations exceed your repayment capacity. 

For instance, when the income that you generate is not enough to clear your debt, the interest on the outstanding loan amounts starts to pile up quickly. This forces you to avail fresh loans to clear off the piled up interest, thereby landing you in a debt trap. 

This is true for both Business & Individuals. However, in this post I will be focusing on "Debt Trap" for individuals.

When you pay the Credit Card debt of more than 24% p.a or say a personal loan of 19% p.a, please be aware that you are paying a "cost of funds" that you are not earning anywhere. When you are using your money to service such debts , you must know that your are denting your ability to save and that will push you away from the path of "Financial Freedom" 

How to get out of a "Debt trap" ?

Step 1 - Control your Emotions 

  • Accept that your are in a trap and that too due to yourself only .Talk with your family and friends whom you trust the most .You might well receive a emotional support and also a perspective 
  • Start making a list of the loans taken with the following columns - Sr.No : Lender : Type of Loan : Amount Outstanding : Rate of Interest : Type of Interest ( reducing or flat ) : EMI : Balance Tenure
Step 2 - Find Solutions 
  • Understand & Change yourself - You should now agree with yourself that you need to save money,  no matter how small the savings are. So don't buy that new phone cover , don't log on Amazon or Flipkart on the Big Sales days, move out of whatsapp groups and FB pages that sell you something, remove apps like ZOMATO which says "dont cook, just order" .Stop some of your entertainment spend be it on Disney Hotstar , Sony LIV etc .Have a look at your wardrobe in case you feel you are owning a SHOP stop buying any more.  In case you always book OLA try an AUTO instead. 
  • Identify Cheaper Debt - In case you are paying 24% to 36%  p.a on your credit card loan replace it with "Personal Loan" which come with 18% interest rate .In case you have a Home Loan ask for a "Top Up" this might be the cheapest loan you can get .Pay of the costliest debt with the money you save on reduced EMI's. Start going to nearby shops for shopping as it might give you much needed exercise and save some more money and also contribute towards "Vocal for Local".
  • Identify Assets you can sell - Scan your room and Almirah before you scan your "Investment Portfolio" to identify what to sell off. In case you find that "Casio" you bought to learn music but you don't have time for it and you have not used it since last 30 days, you see that huge sofa not required , you see that beautiful carpet that you can never use then, OLX करो .  You might also come to know an  "Exotic Investment" that you had done as you read some great story on net or saw a Youtube video but nothing is exotic in it except the seller and low returns than just sell it and square off the loans.

Step 3 - Have a Strategy 
  • Debt Avalanche Strategy - Focus on repayment of High Interest Bearing Loans 
In such a strategy you will pay the Highest Interest Bearing Loans FIRST and then the next costly one and so on .Please remember that you need to pay the minimum compulsory payment on each loan , while the extra Rupees that you saved, should be used to square off the costliest loan FIRST. Once you pay it off in full then you move to the next most expensive loan.

  • Debt Snowball Strategy - Focus on Size of the Loans
In this strategy you will pay the Smallest loan FIRST and then the next small one and so on .Please remember that you need to pay the minimum compulsory payment on each loan , while the extra Rupees that you saved be used to square off the smallest loan FIRST. Once you pay it off in full then you move to the next smallest. If you have many loans this will help to clear the clutter.

  • Making the Right Choice 
Financially , Debt Avalanche Strategy makes more sense than Debt Snowball strategy .However many a times Debt Snowball strategy is better and will give you the much needed confidence that you can come out of this Trap, as you might start tasting success early. Many a times "Mental Relief " is very essential to win a WAR and hence many a times Debt Snowball Strategy might work for you in case you are emotionally very disturbed.

   Please don't be a  लकीर का फ़क़ीर  - 

There is no one best strategy , it depends on facts and your emotional stability and also upon who is managing the process. In case you have 15 loans and  you are going to manage the process , its better to reduce the number of loans by using Debt Snowball Strategy but in case an Advisor is going to help you, let him use Debt Avalanche Strategy. You can also do "Debt Consolidation" instead on Debt Snowball and then use Debt Avalanche Strategy.


ऋण , शत्रु  और क्रोध को समाप्त कर देना चाहिए 
- अमात्य चाणक्य 




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