What is a Debt Trap?

What is a Debt Trap?

A debt trap is a condition in which a person gets entangled in a mess of creditors from whom he had borrowed money. Borrowing money is always risky and the risk remains as long as the debt remains. The risk of a reeling debt is worse than poverty. Debts have the potential to destabilize a person financially. Debt can destroy a person's life if it is beyond his capacity to manage.

Hidden Debt Traps.

There are many types of debts which could potentially prove to be a challenge for the borrower. In most cases, the borrower unknowingly creates the trap for himself. A trap cannot be detected easily and so, the person who borrows money from somewhere never feels that he is moving into a difficult situation. Nobody feels the burden of debt initially. On the contrary, a borrower is most satisfied when he receives money from the lender. Borrowers feel the pressure only when they start repaying their debt.

The Trap in an Agreement.

A debt could be of any type. The repayment mode and the tenure will be as per the loan agreement. When the borrower signs a loan agreement, he agrees to all the terms of service and conditions associated with that loan. Agreements usually are long written or printed materials which the borrower has to sign. If he doesn't sign, he won't get the loan.

The dictum is that the borrower has to sign the agreement in the presence of the lender. The lender won't allow the borrower to take the agreement home for a thorough reading. The borrower has to read it then and there and sign it if he agrees to the terms and conditions of the agreement.

Most borrowers don't read the agreement, either because, they don't have the time to go through the document or the willingness to read it. Some borrowers also avoid reading the agreement just to please the lender.

Signing a loan agreement doesn't hurt the borrower if the lender is genuine. However, if the lender is insincere, then the agreement could become a trap. This kind of debt trap is seen mostly in undeveloped places like villages where unorganised money lending is rampant.

The Traps of Unorganised Lending.

The unorganised lender is often dangerous. Poor people who have nothing to pledge as security will never get a loan from a bank. In such a situation, they approach unorganised lenders, who most willingly offer them a loan with tenures and terms of their wish. The poor keep on paying the interest without any idea of how much they have paid and how much remains to be paid. Such moneylenders are real traps for the borrowers.

The Trap of Being a Guarantor.

Being a guarantor to someone is also risky. If the borrower doesn't pay the dues, the guarantor will be asked to do it. Although, the obligation for the guarantor is always less than the borrower, a signed agreement imposes legal pressure on the guarantor to clear the debt. This is also a kind of debt trap.

Long Running Debts.

Debts which have a long tenure, traps the borrower. The debtor who pays his dues for many years at a stretch would agree with this. Life becomes truly mechanical for the borrower, in all sense, when debts run long. A home loan or a car loan are examples of a long-term debt. Even though, the borrower enjoys the comfort of his home or his car, he is pained by the EMI he pays every month, and gets even more worried when he thinks of the years he will have to continue doing this.

Multiple Debts.

Multiple debts are sure traps. More than one borrowing is called multiple debts. The debtor's burden increases with the number of borrowings. There could be many reasons for borrowing multiple times, like:

(1) A reduction in salary or income: A reduction in income could force a person to borrow money to meet his needs. The reduction in income of an existing debtor forces him to borrow more money from somewhere and this makes him prone to get into a debt trap.

(2) For clearing debts: Some people borrow for clearing their existing debt. This continues their journey as a debtor. If not arrested in time, this could become an endless chain which will eventually trap the debtor.

(3) Borrowing due to emergency: An emergency of any kind drains the money quickly. The problem aggravates, when there is an existing debt. An emergency could force a debtor to borrow more money and get trapped in more debt for more time.

(4) A hike in salary: This may seem ridiculous, but for many people this is true. A hike in salary may inspire a person to buy more. Some people indulge in buying more than what they can afford. When their income increases, they become overconfident of managing their debts. With this confidence, they borrow, even if they have debts to clear.

Traps in the form of Allurements.

Allurements too become traps if you fall into them. An allurement could be anything which encourages a person to buy something. Allurements could be in the form of an advertisement or an offer. People who are carried away quickly by stunning offers and advertisements later find themselves in debt. This becomes a trap.

Banks and credit card companies often allure their customers with fancy offers, which is not wrong, because it is their business. A bank will never try to push its customers into debt, but being a financial organisation, they always want people to buy their products. Loans and credit cards are their financial products and they will always offer them, but accepting them blindly could be troublesome.

The Psychological Consequences of Debts.

A debt trap is not physical; it is psychological. The debtor suffers psychological trauma when he could not repay his dues on time. It can rob a person's mental peace and harmony and could make him insane. Such is the devastating power of debt.

Every loan makes the borrower a debtor. This is a fact which the borrower should be aware of. Normally, for a consciously purchased loan, the debtor is not likely to suffer setbacks and so he can avoid traps. A debt is not a good thing to continue. It should ideally be zero. If it is not, it should be gradually brought to zero.

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