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5 Ways NOT To Attempt To Come Out Of A Debt Trap

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5 ways NOT to attempt to come out of a debt trap

This article is authored by Rajiv Raj, Director & Co-Founder of CreditVidya

Being neck deep in debt is never a happy feeling. Unfortunately, there is no magic wand that can make you debt free. If you are desperate to get out of debt you will have to cut corners and be patient till you repay your dues.

Quick fix solutions almost never work in life and it is no different for debt repayment either. Here are five debt repayment strategies that could backfire on you.

1) Dipping into your retirement savings

There is a reason why financial advisers maintain that you must start saving for your retirement as soon as you start earning. If you have been doing so little by little and building up a corpus to serve you well in your golden years, you should leave it undisturbed under all circumstances till you reach your retirement age. Paying off unsecured debt with your retirement savings is a bad idea and your entire financial plan may go haywire because of the same.

2) Milking your home equity

When you are in debt and have a roof over your head to call your own, you may be tempted to refinance your home or avail of a new loan at an amount that is higher than the old loan. For instance, if the value of your property is Rs 20 lakh and you owe your lender Rs 13 lakh, you can refinance Rs 15 lakh and take out Rs 2 lakh in cash.

You may think of your home equity as a temporary lifeline, but you are actually exposing yourself to a higher risk in such a case.

In case a mishap results in the stoppage of your regular flow of income, you may stand to lose your home.

Trading one debt for another may only be justified in case you are looking at re-adjustments in your equated monthly instalments, or EMI, or you want to avail of a lower rate of interest. Thus, using the refinance route to pay off your unsecured debt is never a good idea.

3) Transferring your balance to a new credit card

This is another case of a debt swap that people think will help them get out of debt faster. A credit card issuer may be luring you with "lower rates" but keep in mind that those lower rates may be introductory rates to lure in a customer and are applicable for the first few months only.

Besides, there is a processing fee that is usually 1-2% of the total outstanding amount being transferred onto the new card.

You may think that you are debt free when you receive a cheque from your new card issuer to clear the loan of your previous card issuer, but that is in fact a myth. Your debt is only transferred.

If you cannot curtail your spending habits and continue to be reckless with your new card, you will land up with an unmanageable debt pile once again.

4) Borrowing money from friends or family

So you have a very supportive family on a group of friends whom you can count on for just about anything in life. Good for you! But do bear in mind that when money gets in the way of relationships, even the best of relationships can get sour.

Think very carefully before asking your support system for money to bail out of your debt pile.

5) Filing for a settlement

When nothing seems to be working and you are at your wits end, you may decide to "settle" your loan or credit card debt. Your bank will accept the settlement of your loan and will not harass you for further installments, but it does have repercussions. The price you pay will show up in your Cibil report and impact your Cibil score negatively.

Besides, this settled loan or credit card debt will affect your Cibil score for the next seven years and remain on your Cibil report for ever, thus making it impossible for you to avail of any kind of credit facility in this interim.

No bank would willingly give a loan to you if you have settled your loan or credit card dues once.

As you can see now, these hacks that you thought could get you out of a debt trap, could actually be akin to tying a noose around your neck.

Instead, take a practical approach and see if you can liquidate some assets or investments to pay off your dues. If that does not seem possible, take up some extra part time jobs that will supplement your income. Keeping your head down and working hard through this period of crisis will see you through.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

DESIGNED BY : Indigo Consulting
DEVELOPED BY :  Prosares Solution Pvt Ltd