Debt trap is a situation where a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal. In other words, the borrower is falls in a vicious cycle of re-borrowing, or rolling over money from another source because they are unable to afford the scheduled payments on the principal of a loan.

This problem which was earlier faced by only people of lesser economic status has now become common even in the upper middle class section. With increased usage of credit cards and monthly expenses being higher than income, debt is an issue in almost every household.Even though coming out of debt is possible with effort, avoiding debt trap is much easier than escaping it. In this article, we’ll see 5 steps to avoid falling into modern day debt traps.

1. Avoid impulse purchases.

These days TV channels, newspapers and internet is full of advertisements with mind boggling offers. Often we are lured into buying what we do not need or more than what we need. Before you go for shopping, prepare a list of things what you need to buy. Buy only those things even though you may find offers. Usually the offers will make you pay more than what you would have paid actually for the particular thing you needed.

2. Avoid using credit cards.

First you will think that you will repay the full amount every month and earn maximum points which you can redeem as gifts. Credit cards are an easy source of money. So you tend to buy more goods. At the end of the month you may not be able to repay the full amount. The outstanding amount will carry huge interest cost of more than 40% per annum. Your trouble starts there.

3. Avoid consumer loans.

Now a day whether it is buying a TV or going for a Goa trip, you will get loans for which you have to pay monthly installments only. So when offers rain during festival seasons, you tend to replace a TV you bought 2 years back or a mobile phone bought a year ago. You should use the equipment to the fullest of its useful life. Go for a consumer loan only if there is urgency.

4. Manage your Spend.

Ensure that all your loans put together, you will not be spending more than 40% of your income on loan repayments. If you want to take a higher home loan, then take it for a longer duration so that the EMI is low.

5. Prepare a financial plan.

A financial plan will ensure that you will have enough cash flow to meet your short term and long term needs. It will provide you a budget. It will tell you how much you should save for achieving your goals like children’s higher education and marriage, house construction and you retirement. Though you may not be able to gratify your desire like a holiday trip immediately, a financial plan can help you fulfill your desire after some time.

Click here for starting your financial planning.