ATM :: How to avoid debt traps: All you wanted to know

By: CreditVidya | April 8, 2015 9:12 am | Financial Express
Not all loans are bad. If the loan is used to create an asset and is productive in nature, it can be termed as a good loan. Home, business and educational loans fall in this category.

On the other hand, if the loan creates no asset or is of very little productive use, it can be termed as a bad loan. A personal loan to go on a vacation or a heavy credit card swipe to buy an asset that would depreciate and an auto loan will fall in the bad loan category. They can create debt traps.

Lack of financial knowledge and discipline goes a long way in preventing people from getting into debt traps. It is important to educate people on loans, bad Cibil credit score and other issues in the personal finance space. While personal loan or any other form of non-collateral loan seem to be the most convenient option, not everyone knows the gravity of the problems one might get into.

The following table explains the different types of loans and also weighs your pros and cons:

Debt Trap
Here are top good practices to manage your finances better:

Save and then splurge: ‘Pay yourself first’, in other words, make the habit of saving a part of your income before spending. This goes a long way in keeping debts at bay.

Budget:If you go into debt, it’s an indication that you are living beyond your means. Without planning, it can be hard to know just when you are overspending. Drafting a budget for short, medium and long term expenses and tracking it allows you to see in black-and-white where your money goes.  Trim your expenses so that the total outflow is less than the income.

Use debit cards: Debit cards are tied directly to your bank account. If you don’t have money you can’t spend on your debit card. Since no credit is extended, you can’t go into debt using your debit card.

Pay off balances monthly: One way to avoid overcharging on your credit card is to allocate money from your bank account before you make any charges. As soon as the charges hit, use the reserved money to pay them off.

Invest smartly: A well researched investment can yield great returns. Keeping abreast with the latest happenings in the financial world also helps one to make smart investments.

By following the above steps, people with bad financial habits can get out of debt traps. By constantly educating oneself and by inculcating financial discipline one can successfully prevent falling into debt.

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