1. Debt trap: 5 quick-fix solutions that don’t work

Debt trap: 5 quick-fix solutions that don’t work

When you are drowning in debt, you are likely to be desperate to find quick-fix solutions to stay afloat and retain your creditworthiness.

By: | Published: July 27, 2015 4:46 PM
debt trap

When you are drowning in debt, you are likely to be desperate to find quick-fix solutions to stay afloat and retain your creditworthiness.

When you are drowning in debt, you are likely to be desperate to find quick-fix solutions to stay afloat and retain your creditworthiness. In this situation, it is natural to tell oneself, ‘Let me get out of this mess this one last time and I will be debt free forever!’ Being neck deep in debt is never a happy feeling, but unfortunately there is no magic wand that can make you debt free. If you are desperate to get out of debt you will have to cut corners and be patient till you repay your dues. In your desperation to ‘make things right’, however, you can end up making some mistakes that will do you more harm than good. Quick fix solutions almost never work in life and it is no different for debt repayment either. So, here are five debt repayment strategies that could backfire on you.

1. Dipping into your retirement savings

There is a reason why all financial advisers maintain that you must start saving for your retirement as soon as you start earning. If you have been doing so little by little and building up a corpus to serve you well in your golden years, you should leave it undisturbed under almost all circumstances till you reach your retirement age. Paying off unsecured debt with your retirement savings is a bad idea and your entire financial plan may go haywire because of the same.

2. Milking your home equity

When you are in debt and have a roof over your head to call your own, you may be tempted to refinance your home or avail of a new loan at an amount that is higher than the old loan. For instance, if the value of your property is Rs 20, 00,000 and you owe your lender Rs 13, 00,000 you can refinance Rs 15, 00,000 and take out Rs 2, 00,000 in cash. You may think of your home equity as a temporary lifeline, but you are actually exposing yourself to a higher risk in such a case.

In case there is a mishap that results in the stoppage of your regular flow of income, you may stand to lose your home. Trading one debt for another may only be justified in case you are looking at re-adjustments in your EMI or you want to avail of a lower rate of interest. Thus, using the refinance route to pay off your unsecured debt is never a good idea.

3. Transferring your balance to a new credit card

This is another case of a debt swap that people think will help them get out of debt faster. A credit card issuer may be luring you with “lower rates” but keep in mind that those lower rates may be introductory rates to lure in a customer and are applicable for the first few months only. Besides, there is a processing fee that is usually 1-2% of the total outstanding amount being transferred onto the new card. You may think that you are debt free when you receive a cheque from your new card issuer to clear the loan of your previous card issuer, but that is in fact a myth. If you cannot curtail your spending habits and continue to be reckless with your new card, you will land up with an unmanageable debt pile once again.

4. Borrowing money from friends or family

So, you have a very supportive family on a group of friends whom you can count on for just about anything in life! Good for you! But do bear in mind that when money gets in the way of relationships, even the best of relationships can get sour. Think very carefully before asking your support system for money to bail out of your debt pile.

5. Filling for a settlement

When nothing seems to be working and you are at your wits end, you may decide to “settle” your loan or credit card debt. Your bank will accept settlement of your loan and will not harass you for further installments, but this does not mean you are let off. The price you pay will show up in your Cibil report and impact your Cibil score negatively.

Besides this settled loan or credit card debt will affect your Cibil score for the next seven years and remain on your Cibil report for ever, thus making it impossible for you to avail of any kind of credit facility in this interim. No bank would willingly give a loan to you if you have settled you loan or credit card dues once.

Thus as you can see, these hacks that you thought could get you out of a debt trap, could actually be tying a noose around your neck and may end up costing you much more than you had imagined. Instead, if you have ended up in a debt pile, take a practical approach and see if you can liquidate some assets or investments to pay off your dues. If that does not seem possible, take up some part time jobs that will supplement your income. Keeping your head down and working hard through this period of crisis will see you through.

By Credit Vidya

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