What is Cryptocurrency A new word emerged in our lives two months after the beginning of the recession of 2008 and gradually transformed from a vague expression ("virtual coin") to the vocabulary used to characterize the new economy. On June 9, 2009 the first bitcoin was released by an anonymous person called Satoshi Nakamoto. For different reasons like the sub-prime crisis, Nakamoto, claimed he is a Japanese man in his 30's, said he gave the open protocol in 2007. Today the new coin is called a "Digital Asset" and decentralization is the principal idea behind it: there's no main institution responsible for regulating it. The most familiar and traded form of Blockchain's technology, Bitcoin, who has crossed the $15,000 lines way back and has shows an image of exponential increase in the past few months. The great advantage of blockchain technology is that it doesn't have to keep records for a large central computer or big managing company. With this ...
What is Debt Trap
A debt trap is a situation where the borrower is taken into a cycle of repayment or redeployment of their loan payments since they cannot afford to pay the principal of a loan. Typically, these traps are caused by high interest rates and short-term conditions.
How Debt Trap works?
Any time a person borrows money from a business lender — be it a loan or a credit line — two fundamental elements of the loan agreement are included. First of all, the principal of the loan: the sum of money borrowed. Secondly, there is the interest: the amount of money paid on the principal by the lender.
To repay the money borrowed means to repay both the principal and the interest. Returning the principal is particularly important as it is the only way for a borrower to advance in fully paying the loan. Many instalment lending is given by amortizing schemes, which means the loan is to be paid out for both the principal and the interest, through a series of daily fixed payments.
A debt trap happens when a creditor is unable to make payments on the loan principal; instead, they can only afford to make payments on the interest. As interest payments will not result in the balance being reduced, the borrower will never get closer to paying off the loan itself. It is quite like a hamster on his wheel: it runs and works, but remains at the same location.
The interest paid on a loan would depend on a variety of factors, including the borrower 's creditworthiness, the type of loan given and the overall health of the economy.
Creditworthiness of the borrower is very critical because people with a decent credit score are usually entitled to better loans at lower interest rates. At the other hand, people with poor credit are also saddled with the few loans they can get through getting higher rates and less favorable conditions. Therefore, the risk of debt fetters for those with bad credit is always very high.
Types of Debt Trap
Payday loan
Check loans or cash advances are sometimes called payday loans. Those loans work by providing money with a pay check, government benefits or other guaranteed deposit for someone. In most cases, the borrower gives the creditor a post-dated loan plus interest check.
These are short-term loans of only 14 days in average. The payday loan interest rate is usually between ₹15 of ₹100 borrowed. The pay day loans must be repaid in a lump sum which, in particular given the short repayment period, can be very difficult for many borrowers.
The lender charges an additional interest rate if a borrower rolls over their payday loan to extend the loan for another duration. A total of 75% of all payday loans come from overhead transfers
Credit Cards
The credit cards are a credit line, which, because of their revolving balances, can lead to a potential debt trap. Credit lines are credit loans that don't give the borrower a lump amount of money, but offer the maximum loan you can borrow.
If a loan line is said to have a revolving balance, it means that the funds available to the loan line are renewed as the lender pays the balance sheet.
For example, if the borrower has a ₹2,500 credit limit on a credit Card, spends ₹100 and pays the ₹100, the borrower still has a full ₹2,500.
The cardholder will not automatically have to repay the remaining balance at once for credit cards. You can pay it off in the long run with smaller payments, but this ensures that the balance stays constant every month.
The majority of credit cards have a minimum monthly charge to be made by the cardholder. This is usually very small, however. It could take many years to pay off the card, while making the minimum payment, and it could cost the cardholder thousands more in interest.
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