5 Common Debt Traps and How to Avoid Them

14 AUGUST 2023

In this article, we discuss 5 common debt traps and how you can avoid them.5 Common Debt Traps and How to Avoid ThemOne thing we can definitely take away from the pandemic is that when you have a Plan B, you may still need a plan C. Right now we’re facing a VAT increase, petrol price increase, and a general rise in luxury products, according to the NCR. This makes debt repayments all the more challenging. Below we discuss 5 common debt traps and how you can avoid them.

Payday Loans

Despite how alluring they may seem, Payday loans are among the most difficult debt traps to escape from and can lead to a vicious cycle. You can borrow money from payday lenders, but the interest rate is high. Not only will you have to pay back more money in interest, but since it's a one-time payment, you'll have to use your next paycheck to make the entire repayment. Repayment plan options are very limited, generally allowing no more than 2-3 weeks to make full repayment. If you're unable to do so then, you may be forced to take out yet another loan.

Using Savings to Pay Off Debt

While taking money out of low-earning savings accounts to pay off high-interest debt may seem like a good idea, this approach might backfire. People who deplete their savings to pay off debt may be left without an emergency fund. If your car breaks down or you get a big unexpected bill, you might then have to use credit cards. And it can be demoralising to have to incur debt for every unforeseen expense. By maintaining sufficient financial reserves to cover unexpected costs, you can avoid making this error.

Minimum Payment

Strive to pay a little more than the minimum repayment for all your debts. If you only pay the minimum payment every month, your interest will go up, and you'll end up paying much more than what was originally agreed upon. Paying more than the required minimum will help you pay off your debt more quickly.

Keeping up with the Joneses

Don’t compromise your financial stability in order to "keep up with the Joneses" or do as everyone else is doing. You start living above your means and find it difficult to save money, make investments for the future, or refrain from taking on more debt. Identify your values clearly. It's important that your money habits line up with your personal values. Make plans for the activities that bring you joy. Maintaining a budget does not need to prevent you from engaging in activities that make you happy. Make better friends and surround yourself with like-minded individuals.

Failing to learn about financial planning

A lot of people end up in unmanageable amounts of debt because they lack an understanding of basic financial planning. They might not be aware of the fees associated with rent-to-own purchases or the high interest rates associated with payday loans, for example. Fortunately, fixing this issue is now easier than ever. Financial literacy, websites, apps, and books are all easily available online.

Read more about Financial Wellness

We are aware of how easy it can be to get stuck in debt. Make sure to keep an eye on all your credit and continue to pay attention to your financial status.