MoneyTalk #3: How do I Escape the Debt Trap and Take Control of my Finances

Question: I read your previous blog “How to save” but by end of the month, there is no money left in my account to save. I have outstanding credit card, personal and education loans. Outstanding loans eat up majority of my income. What should I do?

Debt can feel like a never-ending burden, pulling you deeper into financial stress with each passing month. Take the story of this reader, a young professional who is drowning in credit card bills, personal loans, and debts from friends. Despite earning a decent salary, she is struggling to keep up with high-interest payments, feeling as if she would never escape the cycle. If you, like this reader, feel trapped in a debt spiral, you’re not alone—and there’s hope.

In this blog, we’ll explore how people fall into debt traps and, more importantly, provide practical steps to break free from it. Now is the time to take control of your financial future before it’s too late. Keep reading to learn how!

Debt is something most of us will encounter at some point in our lives. Whether it's student loans, credit card bills, or personal loans, borrowing can quickly become overwhelming if not managed well. The term "debt trap" refers to a situation where one is constantly struggling to repay their loans and ends up borrowing more to cover old debts. It's a vicious cycle that can cause sleepless nights, stress, and anxiety. But the good news is, no matter how deep you're in, there's always a way out.

How People Get Stuck in a Debt Trap

Debt traps are more common than we realize. Here are a few common reasons why people get into this downward spiral:

1. Over-Reliance on Credit: In today’s consumer-driven world, credit cards have become a norm. The ease of swiping a card can create a false sense of financial security. People often spend more than they can repay, leading to accumulating debt over time.

   
   

2. High-Interest Rates: Many individuals fall prey to high-interest loans, often unaware of how quickly the interest accumulates. Before they realize it, a loan of ₹1 lakh can balloon to ₹1.5 lakh due to compounding interest.

   
   

3. Lifestyle Inflation: As income increases, so do expenses. People tend to upgrade their lifestyle without budgeting for emergencies or saving, which leaves them vulnerable to debt when unexpected expenses arise.

   
   

4. Lack of Financial Literacy: Many people don’t fully understand the terms and conditions of their loans. A lack of knowledge about interest rates, EMIs, and debt consolidation can leave borrowers unprepared.

The Emotional Toll: Feeling Trapped in Debt

Debt can also have a profound emotional and psychological impact. Once someone realizes they’re stuck in a debt trap, they often experience feelings of:

• Helplessness: The debt seems so overwhelming that it feels impossible to escape. People start thinking they will never be debt-free.

• Shame: Many people feel ashamed of their financial struggles and are hesitant to seek help. This can lead to a sense of isolation.

• Stress and Anxiety: Constantly worrying about loan payments and accumulating interest can affect mental health and lead to sleepless nights and strained relationships.

From my personal experience, I was stuck in similar situation a few years ago. I used loan for some large purchases, thinking I will pay it off "next month." Later, I got laid off (income stopped, expenses continued) and before I knew it, I was in debt spiral. I maxed out all credit limit, borrowed from friends and unable to see way out of this debt. I felt paralyzed.

What I did? Took Action.

Small Changes I made

Breaking free from debt doesn’t always require drastic measures. Some small, practical changes can significantly impact your financial situation:

1. Track Your Spending: Start by understanding where your money is going. Finance Apps can help you categorize expenses and identify areas where you can cut back.

   
   

2. List All Your Debt: Track all the outstanding debt. It’ll help you focus on paying off debts in planned manner and help reduce the overall amount you owe over time.

   
   

3. Avoid Minimum Payments: Making only the minimum payment on credit cards or loans will keep you in debt longer. Try to pay more than the minimum whenever possible.

   
   

4. Negotiate: Believe it or not, many lenders/creditors are willing to negotiate. If you’re struggling to make payments, call your lender and discuss lowering interest rates or extending your loan term.

   
   

5. Use the Snowball or Avalanche Method:

   • The Snowball Method involves paying off the smallest debt first while making minimum payments on the rest. Once the smallest debt is paid off, move to the next.

   • The Avalanche Method focuses on clearing the highest-interest debt first, which reduces the total amount of interest paid over time. (Not recommended! I’ll discuss later)

Drastic Changes to Make

For those whose debts have spiraled out of control, more significant actions may be necessary. Here are some drastic changes that can turn the tide:

1. Debt Consolidation: If you have multiple loans, consolidating them into one lower-interest loan can simplify your payments and reduce overall interest costs. This is particularly useful for those with high-interest credit card debt. (It can be often become dangerous as it creates illusion of reducing the debt while one has just consolidated it. Hence, not recommended)

   
   

2. Sell Assets: It might be time to consider selling off non-essential assets like an extra car, gadgets, or luxury items. The funds generated can be used to pay down debt faster. (I sold off my old gadgets to generate extra cash. I received few thousands which wasn't large amount but, at that point, any money was useful.)

   
   

3. Cut Major Expenses: Consider downsizing your home, relocating to a cheaper area, or even selling your car to reduce your monthly expenses. These sacrifices may seem daunting but can significantly impact your financial health. (Most of us fail at doing this. We want to maintain our lifestyles while being neck deep in debt. Someone who truly wants to escape this trap, has to make major lifestyle changes and cut off all unwanted expenses.)

   
   

4. Seek Professional Help: If you’re overwhelmed, don’t hesitate to consult a financial advisor or debt counsellor. They can help you create a realistic debt repayment plan and negotiate with creditors on your behalf.

Some Additional Actionable Tips

Here are some actionable tips you can implement today:

• Create a Budget: List all your income sources and expenses, and allocate funds for debt repayment.

• Cut Existing Credit Cards: If you are in debt and still using one. Stop using it today. All efforts should be focused on paying off existing debt, not adding more debt.

• Build an Emergency Fund: Even while repaying debt, it’s crucial to set aside a small emergency fund to avoid future borrowing.

• Automate Payments: Set up auto-debit for loan payments to avoid late fees.

• Seek Out Additional Income: Consider side gigs or part-time jobs to increase your income.

Take Control of Your Debt Before It Controls You

Debt doesn't have to dictate your life. Whether it's high-interest credit cards, personal loans, or borrowing from friends, the longer you wait, the harder it becomes to break free. Getting out of a debt trap isn’t easy, but it is possible. Here's the eye-opening truth: with the right strategy and commitment, you can escape the debt trap and regain your financial independence. It’s time to stop feeling overwhelmed and start taking action—whether through small changes or drastic steps. Remember, there’s no shame in seeking help—whether from family, financial advisors, or professional debt counsellors. Breaking free from debt is more than just a financial victory; it’s about reclaiming peace of mind and building a stable, secure future.