Here Are Four Ways To Get Out of a Debt Trap

A report by the World Economic Forum recently pointed out that debt has been rising in India (read more here). According to data from the Reserve Bank of India (RBI), Indian household debt reached 37.1% of gross domestic product (GDP) in the second quarter of 2020. The overall debt held by households was valued at around 43, 5 trillion rupees, as of March 2021. Government and corporate debt levels have also worsened. While India’s national debt reached almost 89.6% of GDP in 2020-21, public debt reached 70% of GDP. Corporate debt levels have climbed to 47%.

If you are stuck in a debt trap, the first step to solving the problem would be to recognize the problem. Start by assessing your finances and making a list of outstanding loans you have. This would help you strategize better and pay off your debt faster.

Here are four ways to get out of a debt trap:

Take out a secured loan to pay off existing debt: Secured loans are a cheaper form of credit. In this case, the lender holds some form of collateral as collateral and hence the interest rates on the loans are lower as the risk is lower. Consolidate your existing high-interest debt and pay it off with a lower-interest secured loan.

Taking a loan against fixed deposits (FD) is one of the cheapest ways to borrow. Loans against FD are typically priced 50 to 250 basis points above the relative FD rate. Since FD rates are currently averaging 5.5%, you can get a loan against an FD for as little as 6-6.5%, which is cheaper than a home loan. “Most lenders don’t charge prepayment fees or processing fees. The only caveat here is that you must have an FD whose deposit value is at least 10% higher than the loan you are borrowing. So, if you need to borrow Rs 2 lakh against your FD, you should have an FD of around Rs 2.2 lakh,” says Adhil Shetty, CEO of

Consider debt consolidation : Debt consolidation allows you to combine several small debts into a single loan. It can also come with more favorable repayment terms such as lower interest rates and affordable EMIs. It also allows you to keep tabs on your overall debt efficiently and simplifies your repayment process as there are fewer payments to track and repay.

However, debt consolidation loans have their own caveats. “Because debt consolidation is primarily used to consolidate expensive unsecured debt, the new loan may be of higher value and the lender may require collateral as collateral to approve the loan. Debt consolidation loans can also be burdensome. They usually come with a debt agreement which stipulates that the loan amount can only be used to repay existing loans and that the loans would be closed within a specified period, without delay,” says Shetty.

Debt consolidation can also prevent you from borrowing more during the consolidation period. Although, in a way, this is a good thing because it prevents the borrower from taking on more debt. “On the other hand, you may not be able to borrow even in an emergency while the debt consolidation loan is ongoing,” Shetty adds.

Get rid of expensive loans first: When you’re stuck in a debt trap, it would be wise to first identify your expensive loans and pay them off. You should ideally start with the one with the highest interest rate. Then there are unsecured loans such as credit card debts which add to your liability if not paid on time.

Get help from a professional: If you are unable to solve your debt problems, do not hesitate to seek professional help. If you are indeed in crisis, you can always contact a financial planner or debt counseling agency to help you or negotiate with creditors on your behalf. These negotiations typically focus on lowering interest rates, removing late payment penalties, and even restructuring loans.

A debt counseling agency usually charges a fee based on your lending institution and the amount of the loan. There are also many NGOs that offer free debt advice.

In the end, there is nothing embarrassing about going into debt. A little intelligence and honesty can save you from the clutches of creditors and help you live a stress-free life.

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