While a loan from a moneylender may provide temporary financial relief, this might place you in danger of getting entangled financially. In simple words, a debt trap is one in which, for whatever reason, exorbitant interest rates, hidden fees, and rigidity in terms can be expected.
Usually, the borrower gets entangled with more debt than he can pay off. Such traps require informed decisions to break free from, planning, and understanding responsible borrowing practices.
In this post, you will learn some of the most essential strategies for keeping you off the debt traps by moneylenders and how you can borrow safely from a moneylender.
Essential Tips to Keep You Safe Financially
1. Know the Risks Associated with Moneylenders
The first step in avoiding a debt trap set by moneylenders is understanding the risks.
Money lenders are most attractive since they provide even same-day approvals with minimal paperwork. Notably, borrowers should know that there is usually some adverse side to that convenience. Therefore, they should research and analyze the terms provided by each money lender as much as possible and compare them against all the other available credit options or bank loan options.
Usually, some money lenders apply high interest rates, extreme fees, and rigid terms for financial help, making it hard for borrowers to catch up with their repayments.
The main reason people fall into this trap is to understand the actual cost of borrowing, which builds rapidly if missed payments occur or a loan rollover occurs.
2. Know Your Financial Standing Before You Borrow
Thoroughly assess and define your financial situation before approaching any money moneylender to borrow money. Specify whether or not you need the loan and if it is necessary at that particular time. Look at your fixed expenses, sources of income, and your current month’s budget, then calculate whether the payments are affordable.
Most moneylender debt traps start with one acquiring loans without being informed of their long-term implications. Therefore, know how much you can service every month and other financial commitments you may be servicing in making a well-informed decision. This analysis enables you to avoid situations where the loan becomes too heavy and results in further borrowing to meet the repayments, essentially the characteristic of debt traps.
3. Borrow from a Licensed Moneylender
More often than not, licensed money lenders conduct their operations within the confines of particular legal regulations protecting borrowers. They are only allowed to operate within predetermined and controlled interest rates, and by law, they are supposed to show the borrower upfront all the charges that come along with the loan.
Therefore, borrowing from licensed moneylender minimizes the chances of falling into debt traps since they are legally obligated to be open in their dealings. You can check your local regulatory authority’s website or government directory to ensure the moneylender you are dealing with is licensed.
4. Avoid Refinancing or “Rolling Over” Loans
Another common debt trap is refinancing or “rollover over” loans when a borrower can obtain new debt to pay off old debt. This approach inflates the debt balance because additional interest and fees rise, making payment even more difficult.
Therefore, if you cannot repay, consider other options, including debt restructuring or contacting a lender to work out a revised repayment schedule.
Mainly, it will be prudent not to roll over the loan but consolidate your debts with a low-interest lender or seek a financial counselor who will assist in making a workable repayment plan to meet your liabilities without piling up the debt.
Conclusion
The primary way to avoid falling into the clutches of borrowing from a moneylender is to understand the risks associated with money lenders. Select only licensed providers of such services, avoid loan rollovers, or manage your expenditures prudently to keep you away from unaffordable debt cycles.