Avoiding “Debt Traps”
Nobody wants to be in debt.
Sometimes, it’s necessary to borrow money for a big purchase.
You know you’ll end up in debt, but you’ve prepared for this and can make regular repayments.
The problem is when you fall into a massive pit of debt that suddenly becomes harder and harder to get out of.
No matter what you try, you can’t seem to pay off your debts, and the money you owe grows larger and larger.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
In essence, you’ve fallen into a debt trap, and you can’t get out.
It’s possible to get out of a debt trap, but the easiest solution is to avoid them entirely.
As debt-relief experts, we have plenty of experience pinpointing the common debt traps in modern society.
When you become aware of them, you will know what to avoid, keeping your finances safe.
What is a debt trap?
A debt trap is a term that refers to any scenario where someone ends up in a significant amount of debt and can’t repay it.
Typically, debt traps will initially seem like safe ventures.
You feel like you’re being offered a great opportunity to borrow some credit.
However, they may hold hidden fees or have really strict terms that quickly turn the situation sour.
You’re unable to keep up with repayments, meaning more fees are added on, and your debt grows.
Why should debt traps be avoided?
The biggest problem with debt traps is that they force you into more debt.
If you take out a loan and can’t make repayments, you start owing more money.
It’s impossible to keep up with these payments, so you take out another loan to help you out.
Now, you have multiple debts, making the situation more.
You end up trapped in a debt spiral that’s very hard to get out of.
In fact, many people that fall into these traps will end up filing for bankruptcy as they reach a point where they physically can’t pay their debts.
Needless to say, you want to avoid this situation.
What are some examples?
There are a few common examples of debt traps you can easily walk into in modern society.
You need to be aware of them as it’s much easier to avoid a trap if you know where it lies!
Here are the most common traps in Canada:
When used correctly, credit cards can be a clever way of building your credit.
If you pay your bill in full every month, it shows you’re capable of borrowing money and paying it all back on time.
However, credit cards are also the biggest debt trap of them all.
Many people get lured in by minimum payments.
On the surface, minimum payments seem like an excellent thing.
Credit card providers give you a chance to make a smaller payment on your monthly bills.
This will be a percentage of the bill, and it means they don’t hit you with any late fees or extra charges.
For many people, it’s a no-brainer to pay the minimum as you spend less money each month.
However, failure to pay your entire bill will trigger the interest rate on your card.
This adds to what you owe, and you still have the rest of the bill to pay.
Let’s say your bill is $2000 for one month.
The minimum you can pay is, say, 5% of your bill.
As such, you pay $400, keep your credit card company happy, and move on.
You still have the additional $1600 to pay, which gets added to your next bill, plus interest.
Overall, you end up owing way more money than if you paid in full.
This is why credit card debt is so common – people fall into the trap of paying the minimum amount each month.
To avoid this, use your card responsibly and pay your bill in full.
Payday loans are also a huge debt trap waiting to swallow you whole.
Again, this plays on the idea of good intentions that go wrong.
A payday loan is a very short-term loan designed to give you cash in minutes.
The premise is that you get some money to use until payday.
When you get paid, you pay the loan off, and everyone is happy.
A typical loan length will be around two weeks.
Unfortunately, most people struggle to make payday loan repayments on time.
This is where the debt trap kicks in.
Missed payments lead to outrageously high fees and charges.
You’ll likely have a late payment fee tacked onto an extortionate interest rate.
To give you an idea of how costly this is, payday loans in Canada can end up costing the equivalent to an interest rate of 500-600%.
In effect, you’re in a situation where you simply can’t meet the loan terms and end up falling deeper into debt thanks to the interest fees and extra charges.
Avoid this by not going for payday loans as they aren’t set up to benefit the borrower.
Car Title Loans
A car title loan is where you use your car to secure a loan.
It is collateral, meaning your vehicle can be seized if you default on the loan terms.
This is considered a short-term secured loan, and many people use them if they need money quickly.
Again, the major issue is that interest rates are so high.
They can almost be as high as payday loans, but the problem is arguably bigger.
You need your car, so you will do all you can to maintain payments.
This quickly leads to more loans being taken out from different lenders.
In fact, you may get a payday loan to cover your car title loan, sending you into a massive debt trap.
The best advice for avoiding financial traps is to only borrow money if you can afford it.
Take interest rates and additional charges into account at all times.
Borrowing money can be helpful, but only if you’re in a strong enough financial position to pay it back on time.
Get out of your debt traps today!
Are you currently in a debt trap?
Don’t worry, we can help you get out of it with our debt-relief services.
Call us today, and we can book you in for an initial consultation.
Alternatively, feel free to fill in one of our evaluation forms.
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?