Expert Tips to Escape the Debt Trap

The rising trend of over-leveraging among Indian borrowers has sparked growing concerns about personal finance management. According to the Reserve Bank of India’s (RBI) latest Financial Stability Report, around 60% of borrowers who availed personal loans in the second quarter of FY 2025 already had more than three existing loans at the time of loan origination.

This indicates an alarming rise in delinquencies within the unsecured loan segment, including credit card debt. Additionally, the report highlights elevated slippages to Non-Performing Assets (NPAs) from loans in the Special Mention Account (SMA-2) category, where repayments have been overdue for 60-89 days. Although India’s household debt ratio stands at 42.9% — relatively lower than other emerging market economies — the rise in unsecured debt defaults suggests a growing prevalence of debt traps, particularly among near-prime and sub-prime borrowers. For those feeling the weight of mounting debt, adopting a strategic approach to financial management is essential. Here, are some expert tips to escape the debt trap

Assess Your Current Financial Position

The journey toward overcoming a debt trap begins with a thorough evaluation of your financial situation. Start by listing all your recurring expenses, such as:

This will help you identify avoidable costs and free up additional resources for debt repayment. Next, compile a list of your existing loans and credit card debt, including details on interest rates, monthly EMIs, and outstanding balances. Finally, categorize your investments based on their financial goals and returns. Investments linked to short-term necessities or emergency funds should remain untouched. However, discretionary investments with low returns can be redeemed to accelerate debt repayment.

Once your financial evaluation is complete, consider approaching family members or close friends for a soft loan. These informal loans often come with zero or minimal interest rates, making them an excellent option for reducing high-interest debt. However, ensure timely repayment to maintain trust and goodwill.

Redeem Low-Yield Investments

Given that the interest rates on most loans exceed the returns from fixed-income investments, redeeming low-yield investments can be a prudent move. For example: Home loans, typically the least expensive retail loans, have interest rates starting at 8.30% p.a. Fixed deposits in public and private sector banks generally offer rates between 7-8% p.a. By using these funds to repay high-cost debts such as credit card dues (which often attract interest rates exceeding 40% p.a.), borrowers can significantly lower their financial burden.

Prioritize High-Interest Debts

To maximize the impact of your repayments, focus on clearing high-interest loans first. For instance, unpaid credit card dues should be addressed before personal loans, as the former incurs a much higher interest cost.

If you still have a sizeable debt burden, consider consolidating it using credit facilities with lower interest rates. Options include: Secured loans: Gold loans, loans against securities, or mutual funds typically come with lower interest rates and flexible repayment terms. Personal loan balance transfers: Transfer existing personal loans to lenders offering more competitive rates. Borrowers with multiple loans can also consolidate debts through a single personal loan or a secured loan, provided the terms are favorable.

Convert Credit Card Debt into EMIs

For borrowers unable to repay credit card dues fully or access new loans, converting the outstanding balance into EMIs can be a viable alternative. Although EMI conversions carry higher interest rates than personal loans, they are still significantly lower than the finance charges on unpaid credit card dues.

Embrace Financial Discipline

Consistent financial discipline is key to escaping the debt trap. This involves: Sticking to a realistic budget. Curtailing discretionary spending. Avoiding new high-interest debts. Borrowers should also reassess their lifestyle choices to identify areas where expenses can be trimmed.

Opt for Longer Tenures

When consolidating residual debt, choosing a longer repayment tenure can ease monthly EMI obligations. While this may result in higher overall interest costs, it provides immediate relief and makes repayment more manageable. Regularly checking your credit score can help you stay informed about your financial health and eligibility for lower-interest loans. Financial advisors can provide personalized strategies to manage and reduce debt. Build a contingency fund to handle unexpected expenses, reducing the likelihood of relying on high-interest credit facilities in the future.

Breaking free from a debt trap requires a blend of financial discipline, prudent decision-making, and a strategic approach to debt management. Borrowers should prioritize high-interest repayments, consolidate existing loans, and leverage low-cost borrowing options to reduce their overall debt burden. At the same time, maintaining a clear focus on long-term financial goals and adopting a lifestyle aligned with one’s means can prevent future financial stress. By taking these steps, individuals can pave the way toward lasting financial stability and peace of mind.