You land in a debt trap when your income falls short in paying for the EMIs and the interest keeps piling up on the outstanding amount.
You land in a debt trap when your income falls short in paying for the EMIs and the interest keeps piling up on the outstanding amount. You end up taking fresh loans to clear off your existing loans and before you can realise, your debt situation spirals out of control. And once you are in it, it only gets harder with time unless you rescue yourself out of it. Your credit score takes an ugly form, savings and goals go for a toss, and your debts continue to grow monstrous in size. If you find yourself in a situation like this, don’t lose your cool. Take these steps to find your way out of the debt trap before the New Year sets in.
Get rid of the expensive loans first
If you have multiple loans to deal with, don’t try to handle all the loans at the same time. Pick the ones that have a higher cost associated and clear them off first. This may include your unsecured loans such as credit card bills. Loans that offer tax benefits such as home loan and education loan come second in line. Meanwhile you need to bring in a certain amount of financial discipline in terms of timely repayment of EMIs, staying away from new debts, and avoiding unnecessary expenses. This will stop you from inflicting more damage.
Borrow from friends and family
Taking one loan to clear another is a bad option as you don’t want additional interest burden. However, you can always explore ‘soft’ loan options from friends and relatives. These borrowings will have nominal or no interest at all and the repayment schedule will be flexible. Use the fund to clear off your high-interest loan and once you are back in track, you can pay back the loan. However, make sure you have a repayment plan in place.
Restructure and consolidate all debts
If you have multiple loans with different tenures, consider talking to your bank to consolidate these loans into one and restructure the interest and tenure accordingly. It’ll help you to lower the interest rate. You may also negotiate with the bank to increase the tenure in order to reduce the magnitude of the EMI.
Sell assets or liquidate investments to repay the loan
If things are completely out of hand, you may consider selling off your assets which are not in use at the moment such as an old car. You could also consider liquidating your low return investments to repay the high-interest loans. Once your debt level comes down, you can rebuild your investment portfolio.
Cut back on lifestyle expenses
Last but not the least, you can cut back on a few expenses to free up more space for your loans. Stick to your guns at a time like this. Avoid luxurious expenses such as eating out, going to theatres, holidaying etc. and focus on clearing off debts by saving money wherever possible.
Once you are out of this trap, as a preventive measure, avoid taking loans for purchase of any depreciating assets. Loans can act as a powerful instrument in increasing your purchasing power for buying appreciating assets such as property. All you need to do is manage your loans smartly.
(The writer is CEO, BankBazaar.com)