Introduction
Whenever any individual or any business or any organization takes a loan, it becomes very essential for them to make sure that they do not fall into a debt trap. First of all, it should be known what one means by a debt trap. The debt trap can actually have a couple of definitions. One way to define a debt trap is that the debt levels of an entity reach such a high level that it adversely impacts the credit standing of the entity in the lending market. Another way to define debt trap is that the entity’s cash inflow is lower than the cash outflow due to repayment of debt. This also stands for business loans. This essentially means that the current inflow is insufficient to meet the debt obligations. Once an entity enters a debt trap, it becomes extremely difficult to pull them out of the trap. In the case of businesses, if one has too much of business lending, it becomes extremely difficult for the business to survive. Hence, they should take appropriate measures to avoid falling into a debt trap.
Measures to avoid falling in a debt trap:

One should take the following measures to avoid a debt trap:

1. Avoid overdues whenever possible:

One should avoid overdues whenever possible and always ensure to repay dues before the deadlines. This is especially true in the case of credit cards. The banks are profit maximizers and hence make sales pitch regarding outstanding credit. One can revolve the credit card outstanding just by paying 5% of the amount. Each month, the interest charged in approximately 3%. This essentially means that an individual effectively reduces just 2% of the total debt by paying 5%. In addition to this, if one misses a payment, there is a penalty interest payment to be made along with a late fee and GST. An individual usually slips into a debt trap when he gets casual about his overdue EMIs and credit card repayments. All this should be best avoided.

2. Using of one-time cash flows to repay high-cost loans:

There are plenty of times when we get intermittent cash flows. It could be a windfall gain in stocks or a year-end bonus, or a lottery win. More often than not, an individual uses this money to purchase luxuries or unnecessary items or on a vacation or something like that. It is always a better idea to use these kinds of cash flows to repay high-cost loans. Otherwise, if these are not paid, then it could lead to the start of a debt trap for an individual. Hence, it should always be a borrower’s first priority to completely repay the loan undertaken. Even for businesses, profits and one-time gains should be used to repay the business loans and then could be diverted towards other aspects of the business.

3. Reducing the number of loans:

It is very likely that a person keeps taking up loans just because a sales representative of a bank asks him to take one. All these loans accumulate and as a result, the individual ends up quite a number of loans, all with different maturities. It would be a good idea to consolidate all these loans into one loan with a long maturity period. It would increase the EMI period by a bit but it would definitely assist in better cash flow management. One should also try to negotiate on interest rates and service charges with the bank professional whenever and wherever possible.

4. In the case of asset-backed loans, keep a check on the market value:

This concept is a bit more complicated than the previous ones. When an individual takes a loan, he needs to provide collateral to the bank. These collaterals are usually his property or his equity shareholding. Essentially, the individual is taking a loan against his property or any asset he put up as collateral. Now, this asset has a market value. One always needs to keep a tab on this asset’s market value. If the market value of this asset falls below a certain threshold, the bank asks the borrower to bring in additional collateral. This is where the problem begins. As a result of this, the borrower often either ends up losing the asset or paying extremely high margins that one cannot afford. Hence, one thing which a borrower should always remember that only that much amount should be borrowed that is required, rather than what they are eligible for. This is one of the golden rules to avoid getting stuck in a debt trap.

5. Keep control on the conspicuous consumption:

One of the primary reasons one falls into a debt trap is because of a large proportion of the income being spent on conspicuous consumption. It is absolutely alright to sometimes go out to have dinner or spend in order to entertain oneself, but if it becomes a habit, then it is an issue. Spending on conspicuous consumption goods, not only increases the credit card bills but also adversely affects the health of the individual. One should also always try to get online discounts while shopping whenever and wherever possible. Over a long period of time, this would make a huge difference to the budget and can also save the individual from falling into a debt trap.

6. Setting monthly servicing cost limits:

This is an internal rule that one should set when one has undertaken some considerable amount of debt. For example, the total debt of an individual can be two times his assets if it is inclusive of his home loan. If not, then it should not be more than 1.5 times. Similarly, the total of all the EMIs in a month should not be more than 50% of the individual’s take-home salary.

Conclusion:

Falling in a debt trap could be one of the worst things that an individual could face in his life. In order to prevent so, there are plenty of things he could do like setting limits to his monthly servicing costs or reducing conspicuous consumption or even using intermittent cash flows to repay high-cost loans. All these are essential for any individual to maintain in order to avoid falling into a debt-trap. These also apply for business loans. The borrower should also try and minimize the cost of borrowing as much as possible. So, if a borrower needs urgent funds for a business at a very cheap rate, Indifi is a very good option.