Question

What is debt trap??

(Please answer it in points)

Answer 1

a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.

Answer 2

Debt Trap

Debt TrapA debt trap is a situation in which a borrower is led into a cycle of re-borrowing, or rolling over, their loan payments because they are unable to afford the scheduled payments on the principal of a loan. These traps are usually caused by high-interest rates and short terms.

What is a Debt Trap?

Debt traps are circumstances in which it is difficult or impossible for a borrower to pay back money that they have borrowed. These traps are usually caused by high interest rates and short terms, and are a hallmark of a predatory lending.

How does a Debt Trap work?

Any time a person borrows money from a professional lender—whether it’s a loan or a line of credit—there are two basic elements to the loan agreement. First, there is the loan principal: the amount of money that the person has borrowed. Second, there is the interest: the amount of money that the lender charges on the principal.

Paying back borrowed money means paying back both the principal and the interest. Paying back the principal is especially important because it’s the only way that a borrower makes progress towards paying off the loan in full. Many installment loans come with amortizing structures, which means that the loan is designed to be paid off in a series of regular, fixed payments; each payment applies toward both the principal and the interest.

A debt trap occurs when a borrower is unable to make payments on the loan principal; instead, they can only afford to make payments on the interest. Because making payments on the interest does not lead to a reduction in the principal, the borrower never gets any closer to paying off the loan itself. It’s pretty similar to a hamster on its wheel: running and running but staying in the same place.

The amount of interest charged on a loan will vary depending on several factors, including the creditworthiness of the borrower, the type of loan being issued, and the general health of the economy. The borrower’s creditworthiness is a very important factor, as people with a good credit score can usually qualify for better loans at lower interest rates. People with bad credit, on the other hand, will be often be saddled with higher rates and less favorable terms on the few loans they are able to get. This is why people with poor credit are generally at a very high risk for debt traps.