Availed of Festive Season Loans? Here’s How You Can Reduce the Debt Burden..

November 15, 2021 Mutual Fund

The festive season in India starts with the occasion of Ganesh Chaturthi and continues until Diwali. The festivals are special occasions that bring new hopes and new beginnings in everyone’s life. This year, the festive season has broken all the records as India has celebrated the festivals after a long lockdown break. People had new expectations, hopes and were very excited and enthusiastic. The festive season had arrived with ‘do not miss’ discounts and offers that were tempting enough to buy things that could be difficult to afford otherwise. Many of us waited for the festive season to time our big purchases to get the maximum discounts and loan options from the bank, Non-Banking Financial Companies (NBFCs), and credit cards. However, it is possible that many of us went out of budget to get the benefit of the limited period discounts and offers and availed of loans that can be challenging to repay. With innovations in finance and technology, borrowing money has become much easier 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. The reckless spending and lending can become a precarious situation of a debt overhang. This article will elucidate how you can reduce the debt burden of the festive season shopping.

1. Know Your Debts:

Knowing how much exactly you owe, the interest component, and the loan tenure is the first and important step in managing your debt. In order to know your total debt, list down all your old and new loans and credit card payments, and then make a total of it. Now, assess your income and savings to see how you can manage the repayment in the shortest duration.

2. Make Pre-payments:

Although you will not be able to do the pre-payments for recently availed festive loans, it is advisable to check for old loans with higher rates of interest that qualify for pre-payment or foreclosure. By pre-paying the loan, you will save a substantial amount on the rate interest. Therefore, it is advisable to pay-off your high-cost dues by using the savings that are not generating expected profits. This way you can reduce your monthly EMI burden. However, make sure you check the pre-payment and foreclosure clauses as there can be charges for pre-payment or foreclosure of new loans.

3. Do Not Miss the EMIs:

If you don’t pay your EMIs or credit card dues before the due date, the lender or credit card issuer will charge you with late payment fees. Moreover, if the rate of interest is high, the debt gets accumulated, which can become challenging to repay. To avoid building up the interest component and penalties, make sure you pay all the dues on time. If you are recklessly using your credit cards, 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 to timely repay your dues in full. Also, remember that not paying your dues on time can negatively impact your credit score.

4. Limit Your Credit Spendings:

As discussed earlier, the primary reason why many people overspend and avail loans during the festive season is that they cannot control the urge to spend as merchants offer huge discounts on credit purchases. If you are facing a debt burden, then it is advisable that until you pay off all your existing dues, cut down 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 coming out debt-free. Also, do not hesitate to cut off your credit cards if you cannot control binge shopping on credit.

5. Increase Your Earnings:

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

6. Consolidate Debts:

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 offered a lower rate of interest for debt consolidation which will help you save some amount on interest. Taking a ‘personal loan for debt consolidation’ or a secured loan like ‘loan against property’ or ‘home refinancing’ to pay your dues makes sense when you have multiple dues of small amounts that you are struggling to repay it. A debt consolidation loan helps you to manage your dues better by combining them together with a single EMI to pay at a comparatively lower rate of interest. It also offers a longer loan tenure to reduce the monthly EMI expense. However, to save on the interest amount, it is advisable to repay the debt consolidation loan as early as possible. Also, the rate of interest of a ‘personal loan for debt consolidation’ is much higher than the secured loans. You should consider this option only if you are on a verge of falling into a debt trap and need to manage your dues better. Otherwise, if you do debt consolidation for small-amount of loans that are not offering much cost-benefit, then you might end up paying more than what you were paying earlier.

7. Do Not Avail New Loans:

This is very important that you do 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 becomes impossible for you to come out of it. Such situations can mentally affect the borrower, which might lead to severe depression or suicidal tendencies. If it is difficult for you to control the credit temptation, it is advisable to freeze or block your credit cards.

8. Negotiate With Your Lender:

There are some types of loans that you cannot avoid, such as education loans and home loans. Although the rate of interest on such loans is 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, try to negotiate the rate of interest of old loans with your lender.

9. Sell Your Idle Assets:

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 facing a huge debt burden that seems impossible to come out of. 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, 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 if you are unable to pay a few EMIs on time or default the repayment, the lender holds the right to sell your asset to recover the dues.

10. Use Emergency Funds:

Many financial experts do not advise using your emergency funds to repay your debts. However, if you have a sufficient amount in your emergency funds that you might not require immediately. You can use a small portion of it to repay your debts. You need to ensure that you will be able to redeposit the funds in your emergency funds at the earliest. If you think there is a possibility that you might require these funds in a near future or you might not be able to redeposit the used emergency funds immediately, it might not be a good idea to take out money from the emergency funds.

11. Help From Closed-ones:

Borrowing money from friends and family is a great way to instantly get the money. The major benefit of it is that you get the money instantly without having to pay high rate of interest on it. Although you can repay it with flexible options, it is advisable to repay the borrowed money from your closed ones before the promised repayment date. Doing so will help in keeping the relationship healthy. However, if your family member or friend is unable to help you at this moment, it is equally necessary to not to take it personally and let it not damage your relationship.

12. Take Professional Help:

If the debt is huge and nothing seems working then in such cases, 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 immediately.

To Conclude:

Follow the tips discussed in the article to reduce the debt burden of your recently availed festive loans. Since the chances of making any changes in the new loans are less, it is advisable to take the necessary steps to lower the burden of your old loans, which will ultimately lower your total debt burden. Improving your financial knowledge and controlling your temptations to splurge on credit will help you avoid falling into a debt trap. If you want to experience the luxuries and buy expensive items, 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 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 the 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