How To Get Out of a Debt Trap Using a Loan Against Property?

A debt trap refers to a condition when the amount of loan you owe becomes unmanageable. The funds referred to here can either be availed from a single or multiple financial institution. Generally, a loan is intended to help you with your financial difficulties. However, if you don't choose your loans correctly or take them needlessly, it might prove detrimental. Debt traps are caused by various factors including medical emergencies, poor money management, and so on.
 
Now that you know what a debt trap is, let's look at the causes of debt traps before discussing how a loan against property can help you get out of it.
 

Common Reasons for Debt Trap

 

• Unemployment

  Since the coronavirus outbreak, millions of people have lost their jobs. Given this, they found themselves in a situation where not only paying off debt was impossible, but even managing household income was difficult.

• Education Costs 

  The cost of education in India is exorbitant. Paying such a high fee for your child can sometimes result in multiple missed EMIs. Due to accumulated interest and default penalties, the situation will eventually put you in a debt trap.
   

• Unexpected Emergency

  Uncertainty is known to cause financial woes or a debt trap. There is a high likelihood you will have trouble paying your debts on time if you have a serious medical emergency to deal with. 
   

• Extravagant Lifestyle

  If you have a habit of spending money on unnecessary things such as daily partying, shopping every other day, and so on, you are likely to run out of money before your next paycheque is credited. Such circumstances and habits are well-known for trapping you in debt.
   

• Poor Budgeting

  If you do not make a monthly budget and allocate your money for household expenses, child's education, and so on, you may fail to meet your necessities. So, how would you settle your debt if you cannot cover your basic needs?
   

Also Read: Common Queries That Revolve Around Loan Against Property Misconceptions
 

How to Come Out of Debt Trap Using a Loan Against Property?
 

1. Clear Your High-interest Debts

   A loan against property is ideal for debt consolidation. Thanks to its low-interest feature, you can use the proceeds to pay off all of your outstanding debts. This type of loan has a substantially lower interest rate than all the other types of loans available in the market. The low-interest rates are offered because the funds are secured by a high worth property. To understand this better, let us take an example.
    
   Assume you need funds of Rs 25 lakh to pay off all your existing debt. Your debt break-up is such:
    
   • Rs 5,00,000 (personal loan @ 14% interest rate)
   • Rs 7,80,000 (used car loan @ 11% interest rate)
   • Rs 11,00,000 (unsecured business finance @ 13% interest rate)
   • Rs 1,20,000 (credit card dues)
    
   In this scenario, if you are mortgaging a property worth Rs 35 lakh, such as your commercial office, the lender will readily issue you a loan at a low-interest rate of 8.5% to 9%. It is because if you default, the lender would auction off your Rs 35 lakh-worth office space, which might eventually sell for roughly Rs 40-42 lakh due to appreciation. The amount is sufficient to cover both the outstanding balance and interest payable. 
    

2. It Can Easily Cover Your Dues

   Another way that this loan can help you avoid a debt trap is by providing a substantial amount. This loan is available from financial institutions with a loan-to-value ratio ranging from 40% to 75%. You can raise funds up to Rs 15 crore in terms of value. As a result, it is not incorrect to assert that a mortgage loan can always help, regardless of how big your debt is.
    
   However, remember that the LTV depends upon several factors. Some of them are property type, insurance, property condition, and your credit profile.
    

3. Balance Transfer

   Balance transfer refers to a condition when you transfer your outstanding debt balance to a new lender. There might be a situation when you have applied for a mortgage loan without doing your homework, or when you don't have a good credit history, the lender may have approved you for a loan with a high-interest rate. In this case, look for a financial institution that offers a low mortgage loan interest rate. Choose to transfer your balance if you find one.
    

4. Increase Your Repayment Tenure

   If you have a lot of debts and are taking a loan against property to pay them off, make sure you pick the right repayment period. The EMI is lower when the term is shorter. It makes debt consolidation easier while also making existing debt EMIs easier to handle.
    

5. Choose Your Interest Rate Wisely

   The lender gives you the option of choosing between fixed and floating interest rates. They are very different in terms of meaning and affordability. The fixed rates remain unchanged throughout the mortgage loan term. Whereas, a floating interest rate fluctuates according to external factors such as the RBI's benchmark rate. As such, it is critical to properly examine both rates before choosing one.
    

Also Read: Beginner’s Guide For Taking A Loan Against Property
 

To Conclude

 
A loan against property is ideal in every situation, especially when you are in a debt trap. This loan type is affordable due to the large loan amount, low-interest rate, and longer repayment tenure. Moreover, it can also aid you with other financial needs such as medical emergencies, a child's higher education, and more.