How to avoid falling into debt trap

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It is easy to take a loan but paying it back can be quite an arduous task at times. Many individuals find themselves trapped in the vicious cycle of debt. Being aware of the best options available and seeking expert suggestions can go a long way in fixing your financial situation.

Money9 Helpline hosted Raj Khosla founder of My Money Mantra to explain how to avoid debt traps.

Priyanka Jain: My family of 5 just recovered from Covid in 45 days and I exhausted the credit card limit in this period. The credit card interest rate is 38%. Should I apply for a personal loan? Please suggest.

Khosla: I would suggest you meet your credit card payments. It has a high-interest rate of 38% on the outstanding balance. A credit card outstanding interest charge is one of the costliest debts. So you should definitely apply for a personal loan. The personal loan will charge an interest of 11 to 13%, so it will significantly reduce your current interest rates. A personal loan is a time-bound loan and you will be able to pay in EMIs. Also, you must clear your credit card dues so that your credit score remains intact and you don’t have an issue taking a personal loan.

Suresh Khandelwal: I have been doing dry fruits business for many years. I took a gold loan during the last lockdown. I am told that if the gold prices drop and the margin is affected then the bank will sell my gold if I don’t pay back the loan or I have to deposit more gold.

Khosla: Gold is the quickest loan one can avail of in emergency situations. It is like the loan against shares, as it depends upon external forces like market prices of gold. It has a loan to value ratio. So if gold prices fall, the bank will give you an option to deposit more gold or money, or it might sell off if you are unable to pay. You can avail Personal loan OD facility, to pay off your gold loan of banks says that will sell your gold.

Roopak Agarwal: I already have one home should I plan for a new property with a loan considering the Covid situation?

Khosla: It is very tempting to buy a new property, as home loan rates are low and property rates are also low. But under the covid situation, I would not advise for it, since you already have a home and you must be considering a new home for rental income. In Covid times even rental income is under stress.