debttrap

A debt trap refers to a situation where an individual or household becomes trapped in a cycle of debt due to high interest rates, excessive fees, or predatory lending practices, making it difficult or impossible to repay the debt in full. This phenomenon often occurs when borrowers rely on short-term loans to cover immediate expenses, only to find themselves taking out additional loans to service the original debt, thereby perpetuating the cycle.

Debt traps are commonly associated with high-cost lending products such as payday loans, pawnshop loans, rent-to-own agreements, and certain types of credit cards with extremely high annual percentage rates (APRs). These loans often target borrowers with limited access to traditional banking services or those facing financial hardship. The structure of these loans—typically requiring repayment within a short period—can lead to renewed borrowing if the borrower cannot meet the repayment terms, further increasing the total debt burden.

Economic and social factors contribute to debt traps, including low income, lack of financial literacy, and systemic barriers to affordable credit. In some cases, lenders may exploit vulnerable populations by offering loans with unclear terms or hidden fees, making it harder for borrowers to escape the cycle. Governments and financial regulators have introduced measures such as usury laws, consumer protection regulations, and debt counseling programs to mitigate the risks of debt traps.

Recognizing the signs of a debt trap—such as consistently borrowing to pay off existing debt, high interest payments relative to loan amounts, or difficulty meeting basic living expenses—can help individuals seek alternative solutions, such as debt consolidation, budgeting assistance, or financial counseling. Awareness of predatory lending practices and access to responsible financial services are key to preventing and escaping debt traps.