Debt is unavoidable for many people, especially those on salary. But if you develop irresponsible borrowing behavior, it can easily land you in hot soup. Research conducted on 2,042 respondents showed that 15% of those polled had an EMI outgo exceeding half of their salary.
Even more disturbing, 32% of the people interviewed who reported EMIs of 50% and above are older people. These are individuals with fixed incomes. The research also showed that at least 20% of the respondents had taken a loan to pay off an existing one in the last year. One of the most obvious signs that you are slipping into a debt trap is when you tend to take a loan to pay off another credit facility. So, what are the other signs that you may be getting into a debt trap? They include over-reliance on short-term but expensive payday advance like payday loans. Fortunately for Kiwis, a revolutionary new app called PayAid, promises to give them an advance on their salary without interest or late payment penalties. Keep reading to know the signs that you are slowly slipping into a debt trap.
1. Missed utility bill payments
We all miss utility bill payments once in a while. However, if you have started to miss paying your bills frequently, it could be that your expenses have outpaced your income. You are spending above your means, and this is a symptom of getting into a debt trap. Also, it shows you are not financially literate. In time, it will affect your credit score and may also lock you out of low-cost funding. This leaves you with the only option of taking a payday advance. Fortunately, PayAid enables you to take a part of your salary in advance at no interest rate or late payment fees.
2. Loan for regular expenses
Another tell-tale sign that your debts could be getting out of hand is when you borrow to cater for regular expenses like rent and utility bills. It is a big red flag and an indication that you need to have a better grip on your finances. If you have to take out loans to sort your regular expenses like kids’ school fees and rent, you could be sliding into a vicious debt trap. Review your spending and create a budget to know where your money is going.
3. Withdrawing cash from credit card
We have already said how bad practice it is to borrow to sort your regular expenses. Do you know what’s worse? It is to do this using your credit card. It’s the surest way of getting yourself in trouble. Situations may force you to borrow. However, make sure you decide on the type of debt. Always avoid borrowing with your credit card.
4. Failure to Clear credit card dues
Another massive red flag that you need to watch out for is your inability to pay your credit card obligations in full. Unfortunately, not clearing credit card bills is rampant behavior, according to research. The survey shows that nearly 21% of those interviewed reported missing credit card payments or rolling them over after paying the minimum amount due.
5. EMIs Exceed 50% of Your Income
Too many people fall victims to those easy ‘discounts’, ‘sales’, and EMIs. Spending compulsively puts a lot of strain on your finances. Even worse, it can push you to slide into a debt trap. These sales and discounts will always be there and if you cannot control yourself, you will end up getting things on EMIs. And while these standalone EMIs may appear small, when you put together all the EMI obligations, you will realize that you are only left with a small amount of money to cater to other things.
6. Banks refusing loan
Going back to our survey, it was revealed that 5.4% of the respondents have had their loan applications refused. It is a dangerous thing for banks to reject your loan application because you have a low credit score. And while credit scores can range from 300-to 900, most banks will not consider your application if you fall below 750.
And while some banks and other lending institutions may be open to extending a credit facility to you even if you have a low credit score, they charge punitive interest rates. As a word of caution, make sure you check your credit ratings every once in a while. This will enable you to work towards improving it if you find that it is low. Your credit score is very important. It is what most banks check first before even opening your loan application. It is a big mistake to ignore your credit score.
6. Borrowing hoping on future income
Another sign that you may be slipping into a vicious debt trap is when you borrow intending to repay the loan if you get a bonus later on in the year. We all hope for the best and never consider possible that may crop up in the future. If you have to borrow do so based on your current salary. Do not borrow based on future increments or bonuses.
7. Taking Loans with rising EMIs
Most people overestimate future salary increments. As the base is significantly small, increments tend to be higher at the beginning of your career. Therefore, assuming that increments will keep coming until you retire to enable you to take bigger loans may not be a smart strategy. Also, banks encourage such imprudent habits by availing loan products in which EMIs rise with time.
Sliding into a debt trap comes with severe consequences. You will constantly be in debt and it can really mess up your financial situation. That is why you must do everything possible to avoid getting into a debt trap. But for you to do that, you must know the signs that you could be sliding into a debt trap. Fortunately, that is what we have talked about above. They include borrowing short-term loans like expensive payday advance facilities from payday companies. While we cannot avoid borrowing entirely, think twice before you do. Research your available options and get a loan that gives you the best deal, like PayAid which does not charge interest or late fees.