Loans – Deep down in Debt

We all like a good life style, but we do not have the money to match that life style. Many of our friends have a better life style than us, so to keep up with them ( we call it peer pressure) we take loans. So at the end of the day we end up with different loans viz. Home loan, Car loan, Personal Loan (to go on a holiday), etc.

As time passes, the pressure on our finances keeps mounting and you do not have more options to go directly to the bank. So to service these loans you go for an easier option. Your wallet, yes, the credit card in your wallet. The moment you start servicing your debt using the credit card option and you are in deep trouble.

Interest on credit cart dues is usually the highest. In case you reach such a stage, the best option is seek professional help. Don’t dig the pit deeper for yourself, the deeper the pit, more difficult for you to climb out. As your borrowing grows your credit score starts going down and it would become difficult for you to get loans.

Currently the interest rates are not linked to your credit score, but it would start soon and your interest rates would start rising if your debt starts increasing. Should you wait till you reach the stage of borrowing using your credit card or your try to assess the damage you have done earlier?

Earlier, then the thumb rule would be the moment your loan repayments goes beyond 50%, its time you had a relook at your loans. You have to start looking at repaying and getting out of debt. So which debts should you repay first? Those loans which do not help in building an asset should be the first to be repaid.

There would be cases where there are multiple, in such case repay the one with the highest interest. The task is difficult. You cannot just pay off the debt; it needs to be done over time. You first prepare a plan and stick to the plan. This requires discipline and a lot of sacrifices. It would change your life and lifestyle.

The first loans to repay should always be credit card loans. As mentioned earlier they are the costliest. Try by taking a personal loan or converting the credit card balance to a personal loan. This way you would have shifted from a high interest bearing loan to a lower interest bearing loan.

With your outgo coming down, because of lesser interest rates, next target the higher interest bearing loans. There might be pre-payment charges for repaying earlier, but it will still be worth it. Don’t just repay loans which give you a tax benefit, though the interest rate may be high, if you consider the tax benefit, it might be low.

As mentioned earlier, you could get a cheaper loan to repay a high interest bearing loan. You could borrow from your PPF, where the interest rate is 2% higher than the current interest rate. So if you are repaying a loan with interest rate or 12 % or more with a PPF loan, you are still better off.

Another method of repaying loans would be to liquidate investments. If your rate of return on investments is lower than the interest rate you are paying, it is better to liquidate the investments and use the money to repay the loan. Markets might go up, but it would be better to get out of debt first and then use the money saved to invest when you have funds in hand.

The cheapest funds you can get is by cutting down on expenses. Cut down your expenses and use the money saved to repay the loan. The faster you come out of the debt trap, you could start enjoying life better faster.