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What is a Debt Trap and how to Prevent it?

You will fall into debt if you do not pay your bills on time and you are charged additional reminder fees and default interest. The longer you postpone billing payments, the deeper you fall into debt. The most common reasons for over-indebtedness include:

  • 26% unemployment
  • 9% illness
  • 9% divorce
  • 11% consumer purchases
  • 9% failed self-employment

Debt trap with loans, credit card, car leasing

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Often people get caught in a spiral of debt due to unfavorable loans or credit card conditions. Many borrowers do not read the terms or do not take the time to understand them. In the event of an unexpected financial breakdown, it ultimately turns out that the loan agreement is not as flexible as expected. For this reason, it is always important to agree on the best loan agreement terms possible. If you fail to consider these two points when choosing a loan, sooner or later you will regret it.

Consider cheaper options

If you pay too much for your loan, it is recommender to refinance. When choosing the right credit card, consider the type of credit card, interest rates, and fees. You can also fall into a debt trap with car financing. Above all, you should make sure that you do not choose long terms for the car loan. Terms of several years result in high interest payments even if you no longer use the car.

Debt trap – insurance

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We often take out an insurance policy once and then don’t touch it again. If an insured event occurs, we suddenly find out that our insurance does not cover the damage or that we have to pay a high deductible. This is not an uncommon scenario, so be well informed about the insurance conditions. Weigh up whether your insurance makes sense and under what conditions you can terminate it. If you want to optimize your expenses, insurance is definitely an area that you should look at separately. You may be able to negotiate better insurance conditions with another provider and thus lower the price.

Debt trap – house

Land tax, household expenses, and mortgages represent a significant amount of money. Gas, electricity, and water are expenses that are billed monthly or quarterly. It is important that you always have an overview of these costs. You should be aware about your consumption from energy suppliers and other costs in order to be able to plan any additional payments. This will protect you from unexpected expenses and give you time to save money for them.

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Cell phone debt trap and entertainment

Young people in particular tend to spend too much money on cell phones and entertainment. You should definitely consider whether you actually need the latest mobile phone or the most powerful iPhone. Making calls can be just as expensive. The comparison of products and tariffs is crucial here. Check whether the expenses for entertaining the children can be reduced. Are subscriptions like Amazon Prime or Netflix really necessary?

How can the debt trap be avoided?

  • Make a budget. Even if this task involves a certain amount of effort, it will help you to keep a better overview of your income and expenses. It is important to update this budget regularly. Household book apps are particularly suitable for this. With the help of these applications, you can document your income and expenses on your mobile phone at any time. So you always have an overview of your finances.
  • Build up financial reserves. Nothing is more uncomfortable than when you have an unexpected expense and you have to overdraw your checking account. Overdraft facilities are one of the most expensive loans and should only be used at short notice in urgent cases. If you put some money aside each month and possibly even invest it, you can save the interest on your overdraft facility.
  • Increase your earnings. Take up a part-time job or increase the scope of your work with your current employer. If you do an excellent job, you can even request a raise, which will increase your earnings.
  • Pay your bills on time. You should always strive to pay all bills on time. If you do not do this, you may be charged additional reminder fees and default interest. This increases your overall costs. If you notice that you cannot pay the invoice on time, get in touch with the creditor, and extend the payment term or ask for a deferral. This is definitely a better strategy than constantly putting off the unpaid bill.
  • Never pay off your old loan by taking on new loan. Many people believe that when you replace an old liability with a new one, it improves their financial situation. Not correct. Debt rescheduling is only suitable if you can borrow the new capital on favorable terms. The total cost of rescheduling should be calculated separately.
  • Cancel subscriptions. Cancel subscriptions that you are not using. Often you get fitness or other memberships that you hardly use. Take a look at your bank statement and cancel subscriptions that do not bring you any added value.
  • Make a shopping list. Before you go to your preferred supermarket, you should always make a shopping list. The reason for this is that you are influenced by advertising in the supermarket and ultimately buy more than you intended. Spontaneous purchases can increase your bill by up to 20%. If you have a shopping list with you, you can orientate yourself on the products that you actually need.
  • Avoid expensive consumer goods. Of course, you should treat yourself to something from time to time. Regular shopping in luxury stores should be avoided if you want to optimize your budget. Buyers should endeavor not to borrow money to purchase consumer goods.

Admit debt and weigh options

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Sooner or later you will have to deal with your debts. This is important in order to evaluate the situation and to be able to take improvement measures. First of all, try to weight in payments and expenses. Talk to your credit company and ask them to postpone your payments. This can give you some time to save money without going into debt. If you have lost track of your debts, it is advisable to get in touch with the creditors to find out about your outstanding debts. Anyone who has financial problems and is in debt should seek debt advice in their area. This helps the debtors to take measures to avoid falling further into the debt trap. If you receive mail from debt collection companies, you should definitely have it checked by the debt counselor and not sign any documents. Always keep track of your finances, save money, invest your capital and plan ahead. To find out more, follow this site.