Loans can solve problems — or create bigger ones if handled poorly. A debt trap is when you borrow just to repay other debts, and the cycle never ends. Here’s how to avoid falling into it:
- Borrow only when absolutely necessary. A loan is not “extra money” — it’s a commitment. Take it only for urgent needs or investments, not wants or lifestyle upgrades.
- Always compare interest rates. Some lenders charge sky-high rates that can double your loan in months. Look at the APR, not just the monthly figure.
- Check for hidden fees. Processing fees, late payment charges, insurance add-ons — these can silently inflate your debt. Ask for the total repayment amount upfront.
- Pay on time — every time. Late payments lead to penalties and damage your credit score. Use reminders, auto-debit, or calendars to stay ahead of due dates.
- Avoid rolling over short-term loans. Payday and microloans may look small, but rolling them over means paying fees again and again. It’s a debt trap in disguise.
- Know your debt-to-income ratio. If more than 40% of your monthly income goes to repaying loans, it’s time to pause and reassess — not take more credit.
- Have a repayment plan before borrowing. Don’t borrow hoping “you’ll figure it out later.” Know how and when you’ll repay — and what sacrifices it might take.
Smart borrowing helps you move forward. Blind borrowing holds you back. Avoid debt traps by asking questions, reading terms, and borrowing with a clear plan.