With the ease of access to easy credit, borrowing money-be it for short term or long term-has increased drastically in India. Hence, the debt of borrowers is also increasing. Industry experts say individuals take managing debt very lightly when it comes to financial debt. It is seen that most get stuck in the never-ending cycle of repaying loans one after the other. And then, instead of aiming at achieving financial goals and planning for a healthy financial life, most end up worrying about clearing their debts.
Firstly, to correct such a situation, one needs to start cutting down on any extra money spent on non-productive activities. All of which should be used towards paying off one’s debt is the basic rule of debt reduction. Financial planners say unnecessary splurging, by means of a credit card or online credit, with a debt to still pay off is thereby attracting liabilities.
If you have been in a similar situation, it is time to usher in some much-needed changes. Find out how to steer clear of the debt trap.
- Calculate how much you owe
Firstly, start with calculating overall how much you owe. It’s seen that most salaried individuals nowadays simultaneously have multiple loans to be repaid. These are generally in the form of car loan, education loan, personal loan, home loan, credit card bill or online credit.
Experts suggest borrowers should note down the amount to be repaid, the current EMI, along with the interest rate to manage multiple loans, also with the number of months left to pay off the loan.
- Differentiate the good and the bad loan
Generally, debt is classified as good debt or bad debt. When you take the help of a lender such as financial institutions or banks for buying a house or an educational degree, it is termed as good debt. As these help in building asset without taking a hit on the personal finance front, and also offers a tax deduction.
Bad debt is when you borrow money to buy a depreciating object. Experts say segregating debt will help you prioritize which of them need to get rid of first. One should concentrate on clearing high-interest bearing debts first.
- Limit your credit card transactions
When deep down in debt, stop further using your credit card. It might seem hard for some people but, over medium to long term, it works wonders, or until your debts are paid off. Instead, make payments from your debit card or use cash. If you face a situation where you think you can’t make a cash payment, you should simply avoid making that purchase. This way you will avoid splurging.
Experts suggest as the interest levied on the credit card is very high, you should pay it off by taking a soft loan from friends or relatives and clearing off the credit card debt as soon as possible. Limit using your credit card only in times of emergency.
- Make a realistic spending plan
Every 30 days there are unavoidable utility bills that we need to honor. Differentiate between ‘want’ and ‘need’, as spendings under ‘want’ can wait until you are out of your debt, while spendings under ‘need’ must be taken care of first. Also, look out for ways to change your spending habits and try to cut out unnecessary spending.
- Don’t opt for new assets
When in debt, avoid making investments until you are out of your debts, no matter how lucrative they seem. If you plan on buying a new asset, such as a car or real estate, it will mean you taking on further loans, which is not at all a good idea when you are already saddled with plenty.
Also, your credit rating is bound to take a hit, with loan repayment defaults, which means chances of raising credit in the future might become hard.
- Get help if needed
If you have multiple debts simultaneously and have been rolling your credit for some time, you can consider opting for a financial planner. You can also opt for debt counseling agencies which also provide the needed professional guidance. These financial planners or agencies minutely analyze an individual’s debt situation and provide options to tackle it.
- Involve family
You should also communicate with your family members, on your debt status. It shouldn’t be that only one person of the family bears the brunt of all the accumulated debt, while others continue with their lifestyles. Such a flawed approach to dealing with debt should not be adopted.
Collectively, certain sacrifices can be made. For instance, skipping the yearly vacation and clearing a personal loan or making payments towards credit card dues.