How to Avoid Debt Traps during Coronavirus Pandemic?


People are struggling to go back to normal. As millions of people continue to lose their jobs, suffer health and wealth crises due to coronavirus, another aspect that has kept people worried is how debt traps and loan sharks will play out. We all have one or the other loan to repay, and COVID -19 made it even tougher. I made us more vulnerable toward getting into debt traps to pay for our daily needs.

A similar situation happened in the past during the foreclosure crisis, where people were struggling, and the scammers were all around, taking advantage of the people who could not afford the fees. According to some reports, during the 2008 recession, approximately 200 people were living with the ever-rising unemployment effects. In 2018, there were nearly over 100 lenders around the central San Joaquin valley. 

Last, there were almost 1500+ licensed locations in California offering payday loans to people, as per the reports from the Business Oversight Department. However, over the last decade, this number has declined gradually. 

As per the state law of California, the lenders of payday are allowed to loan up to 300 dollars and charge only a fee of 45 dollars according to the reports from the Business Oversight Department. Until last year, the average percentage for payday loans in California was 376%, which is massively higher if considered with the percentage rate offered on the credit cards. 

When we look at all the branding done by the loan industry, they are always stressing that they are here to ease our financial issues. But advocates argue that they are preying on our financial liabilities and target financially vulnerable audiences. Easy money will only put you in stress as it put you in huge debt. If we look at California, you will notice that most lenders are located in areas that house above-average poverty circles. 

If the reports are to be believed, the US Labor Department reported around 1,87,000 claimed insurance reports of unemployment in recent times. Unemployment is on the rise, and you will face a financial crisis that will last more than two years.  

Come June, we may see private-sector employment fell by nearly 50,000 employees or around 12 percent employment loss. 

People are finding it challenging to come out of these unprecedented times because their jobs are at risk, and lenders are the only quick option to fund their debts. But are we going to the best option? Only time will tell. 

As per a new law made last year, the capital interest rate was 36 percent for loans that amounted to 10,000 dollars, but this does not apply to small lenders, only lenders with more significant funding. 

If you are looking for a loan and need expert guidance on how to find funding without falling prey to debt traps, you can reach out to us. Also, here are some ways that you can be careful. 

Approach your credit union or bank

If you find it challenging to make timely payments, then the ideal first step will be to reach out to your bank or lender. A lot of lending institutions have considered the current situation and have provided their borrowers a cooling-off period for a month or two. 

Several lenders have approached their clients and asked them to stay safe and offered them relief in terms of payment. Even multinational banks have reached out to their clients and asked if they are cash strapped and found a middle ground to control the situation. Many institutions are offering lower interest rates during these times. 

Signs that you are in a debt trap

If you don’t want to invite any more trouble, it is essential to see and look into the signs of debt trap early on. Here are some signs that you should look out for: 

–         EMIs over 50 percent of your income

With the many financing options available, we don’t have a way of controlling our spending. It is natural to fall prey to discounts and new avenues that pop-up in the market. In such times, some of the borrowers are also underwriting a sudden spurt in the EMI amount. Be a constant lookout for such messaging and nip it in the bud. If you notice that your EMI has exceeded 50 percent of your income or the agreed amount, raise a red flag because you will soon fall into a debt trap. 

–         Keep a check on your expenses

Apart from EMI, every individual has some fixed monthly financial obligations. These include rentals, household expenses, bills, and more. Therefore, your income to requirements ratio should never be more than 50 percent. If this increases to 70 percent and above, it is a warning sign to the debt trap. 

–         Rejected loan application

If your loan application has been denied by a financial institute recently, you are slowly inching towards the debt trap. Before granting a loan to anyone, every financial institute does its own set of background checks to ensure that its funds come back to them in a timely fashion. If you are already neck-deep in debt and cannot pull off another loan, no financial institution will extend monetary help. Even if they agree, the interest rate will be extremely higher as compared to normal. 

Debt trap: How to get rid of it?

Understand the problem and find a solution

On your own, you will have to perform a detailed review of your expenses and the existing debts that you have. Here are a few things that you can do: 

– Firstly, accept that you are going through debt problems

– Highlight all the areas that are contributing to your debt

– Make an actionable and easy to follow a plan to recover from the mounting debt

Create a budget and prioritize all your needs

Once you have understood your debt situation, you will be able to distinguish between essential and non-essential items in the list clearly. 

– Prioritize all your financial requirements

– Your priority should be – debt repayment. So, that you can look to improve your long-term financial standing

– Avoid indulging in non-essential items and unnecessary purchases until you have paid a massive chunk of your loan

Look at the option of debt consolidation.

If you have multiple active loans and pay them out at different times of every month, then look at your options. One of your options can be consolidating all your high-interest debts by applying for a low-interest financing option or opt for a debt consolidation loan. Once you have combined your mortgage, you have to worry about making one payment to one lender every month. will help in: 

– Saving some money on interest

– Paying timely EMIs

– Paying your debts quicker

– Regaining financial stability

Start automating your payments.

Repaying your EMIs is committing to your lender. And when you start automating your payments, you ensure that you stand true to that commitment. Once you give instructions to your bank to automate payments, you will: 

– Be paying regular EMIs

– Ensure that timely payments help you reduce your debt quicker

– See a steady growth in your credit score

Steer clear of more debt

While you are already neck-deep in debt, absolutely avoid piling on more debt. Mindfully ensure that your income to debt ratio is not more than 40 percent; otherwise, your finances will be at a higher risk. 

Consider paying expensive loans

Make a concrete plan, and look at all the expensive loans that you have and work on clearing those first. 

Involve professionals

If you are strapped in debt and have fallen prey to the debt trap, it is best to consider getting professionals involved and letting them do their best. Financial professionals will plan, look at the debt and expenses, and chalk-out a simple plan that will help you get out of your debt trap. These professionals will speak to the lender on your behalf and negotiate terms, read the underwriting, and get you some breathing period. 

If you are looking for professional help, then contact our team of professionals, and we will guide you every step of the way. Private Capital Investors has been providing services to investors who want to invest in commercial real estate.

We offer all types of loan programs like a commercial real estate bridge loan, hard money loan, stated income loans, etc. We have experienced commercial real esate loans advisors who help you get the right commercial property loan as per your requirements. We deal in mostly all types of commercial properties like multifamily, retail stores, senior housings, offices, shopping centers, daycare, etc. 

Want to learn more? Get in touch with us today.

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