10 Proven Tips to Lower Your Debt Burden

November 1, 2021 Mutual Fund

With innovations in finance and technology, borrowing money has become much easier nowadays than it was a few years ago. A few taps on the phone along with a quick online verification is all it takes to avail of a loan. Having said so, individuals, especially millennials, are getting allured by the easy access to credit, which is the primary reason for the lack of financial discipline among young adults. The reckless spending and lending can create a precarious situation of a debt overhang.

If you want to achieve certain goals at an early age then take advantage of tax benefits. For example, a home loan and an education loan are essential loans. These loans are generally considered as ‘good loans’ because they actually help you to manage your financial requirements. Not all loans are ‘bad loans’, so you cannot avoid all types of loans. However, availing of personal loans and excessive use of credit cards and credit apps are considered ‘bad loans’ as they can create a debt burden that you might struggle to pay.

Before going further, let’s first understand what Debt Trap is:

A debt trap is a situation when you are constantly in a cash crunch and are forced to take new loans to manage your expenses, existing loan or credit card dues. If you are in a debt trap you owe multiple dues to multiple or single lender/s that creates a financial burden on you. The situation mainly arises due to over splurging and binge lending.

Let’s take the example of Abhishek, a young aspiring engineer who completed his B.E. (Computer Science) and started working in an MNC in Mumbai. To mingle with his well-settled colleagues and to be counted as one of them, he started going out with them for parties, movies and vacations. Over a period of time, the lifestyle expenses became unaffordable for him, as he had other fixed expenses, such as house rent, education loan EMIs, food, etc. Abhishek then applied for a credit card and since he was getting sufficient period to repay the amount, he started using it to its full capacity, along with the ‘Buy Now Pay Later’ scheme from various apps. In less than two years of getting a credit card, he is already paying EMIs that are half of his monthly salary, which has led him into a debt trap.

From the above example it is clear that, if we do not keep control over our spendings and continue doing credit transactions without considering its consequences then we can fall into a debt trap.

It is very hard to get out of a debt trap, but if you follow the below listed financial discipline tips, then it might help you lower your debt burden over a period and slowly you can come out of the debt trap.

1. Know How Much You Owe:

Many people say that they are under a huge debt burden but do not even know how much do they actually owe. However, knowing your total debt and its tenure is the first step towards coming out of it. List down all your loans, including credit card payments, and make a total calculation to know how much you owe. Now, assess your income and savings to see how you can manage the repayment in the shortest duration. Remember that planning a budget can help to keep you in track of your earnings and spendings.

2. Debt Consolidation:

Consider consolidating all your debts under one roof, as it will be easy for you to manage all the debts and you will not miss any EMIs. Moreover, you might get an offer of a lower rate of interest for debt consolidation which will help you to save some amount on interest.

3. Pay off As much As You Can:

While assessing your debts, check for old loans with higher rates of interest that qualify for prepayment or foreclosure. If you have any savings that are not generating expected returns, then it is advisable to use those funds to pay off your existing dues. This will help you save a substantial amount when the earnings on investments are lower than the rate of interest of your loan.

4. Do Not Create New Debts:

This is very important that you should not avail more loans when you are already under a debt burden. You might face a cash crunch sometimes but taking more loans can put you in such a state of debt overhang that, it will become impossible for you to come out of it. Such situations can mentally affect the borrower, which might lead to a severe depression or can create suicidal tendencies. If it is difficult for you to control the credit temptation, then it is advisable to freeze or block your credit cards.

5. Negotiate on Loan Terms:

There are some types of loans which you can avoid, such as education loan and home loan. Although the rates of interest on such loans are comparatively lower than other types of loans, the loan is huge and the tenure is typically longer. As the credit rule says, the longer the loan tenure, the more interest you have to pay. Hence, it is a good idea to minimise the loan tenure as much as you can to get rid of the debt earlier. However, if it is not possible, then try to negotiate the loan terms with the lender. If you have been an old customer with good credit history with them, then in such a case they may consider your request.

6. Make Timely Payments:

Not paying your EMIs or dues on time leads to debt accumulation and it can attract late payment charges. To avoid building up the interest component and penalties, make sure that you pay all the dues on time. If you are recklessly using your credit cards, then you might get tempted to pay the only minimum amount due. However, paying only the minimum amount will increase the interest component and you will end up paying a much higher amount. Therefore, it is essential that you timely pay your dues in full. Also, remember that not paying your dues on time can negatively impact your credit score.

7. Cut Down Your Expenses:

As discussed earlier, the primary reason why one falls into a debt trap is the urge to spend on credit. If you are facing a debt burden, it is advisable that until you pay off all your dues, cut down your unnecessary expenses and luxuries like expensive dinners and holidays, buying expensive stuff, such as clothes, gadgets, etc. It can be hard initially to make such lifestyle changes but they are worth getting out of a debt trap. And, as stated above, do not hesitate to cut off your credit cards if you cannot control binge shopping on credit.

8. Sell Your Idle Assets:

Selling assets like houses, gold, investments, etc. can be emotionally draining. However, it makes sense to sell off the idle assets in times of need as it is the ultimate purpose we invest in them. There is no point in keeping the assets while you are in a debt trap that seems impossible to come out of it. But, if the asset is something your family or you are emotionally attached to, it is advisable to consider taking a Loan Against the Asset. Since these loans are backed up by collateral and the rate of interest is lower than unsecured loans. This way you can consolidate your debts at a lower rate of interest. However, keep in mind that the lender holds the right to sell your asset to recover the dues if you are unable to pay a few EMIs on time or default the repayment..

9. Increase Your Earnings:

Increasing your net earnings might not be possible for everyone, but you can try to do a side hustle, such as monetise your hobbies, rent out a property, negotiate for a salary increment, etc. If your spouse is a homemaker, then you both can together discuss the possible income opportunities for both and can share some load. The extra income which you will earn can be used to repay your earlier loan or you can save that amount to foreclose any loan in the future. The increased earnings will help you reduce your debt to income ratio.

10. Seek Professional Help:

If the debt is huge and nothing seems working, it is advisable to take the help of the financial experts or consultants who will guide you to come out of the debt trap as soon as possible. If you cannot afford a financial consultant, take the help of the experts from the bank. Many people hesitate to seek professional help to take the advice of debt management, thinking that the consultant will judge them for their debt trap. Whereas, in reality, they are like doctors who are keen on solving your issues without any judgements if you provide them with the correct information, without hiding anything.

To Conclude:

To avoid falling into a debt trap or come out of a debt trap, you need to learn how to be financially disciplined. Financially literate and disciplined individuals make wise choices and never fall into debt traps. Therefore, it is advisable to improve your financial knowledge and control your temptations to splurge on credit. If you want to experience the luxuries and buy expensive items, then start saving and use your savings to finance your splurging. Personal Loans and credit cards are supposed to be used only for emergencies. If you are getting better deals on shopping through a credit card, make the repayment instantly. It is not advisable to use credit apps for day to day needs as such apps can be addictive, and you will create an enormous debt out of your small purchases in no time. Controlling and avoiding the use of credit facilities is the basis of financial discipline.

This article first appeared on PersonalFN here