Are you struggling to make your way out of a debt trap? We’re here with a few guidelines to help you ease your way out of its jaws.
Most of us are consumed by the perils of debt. If debts are left unaddressed, they begin to accrue over time, slowly eating their way into your monthly expenses and, eventually, damaging your finances beyond repair.
Studies have confirmed that emerging debt-free is one of the best ways to improve your financial health. And the first step to handling your debt is to take cognisance of the amount you owe. Begin by acknowledging your debt.
We understand that the number can be quite intimidating, but knowing what you must pay off is a good start to clearing your debts.
Pro Tip: Use our Loan EMI Calculator PLUS to track the repayment of your loan EMIs.
Once you’ve come to terms with your debt, your next move should be to prioritise your debts. This applies to those who have a mix of debts including outstanding Credit Card payments, Home Loan or Personal Loan EMIs, or even a sum of money you’ve borrowed from a friend.
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One of the best ways to pay off long-standing debt of a huge amount is by allocating resources available to you for the repayment of debt. It’s great if you have the bandwidth to liquidate one of your assets for debt repayment. This way debt repayment won’t take a huge chunk of your monthly paycheck.
Are your finances bearing the brunt of a high-interest debt? Paying that off first should be your highest priority. We also suggest that you keep saving as much as possible while paying off the debt, even if it is in meagre amounts, besides focusing on getting debt-free as fast as you can.
Consider these four ways to strategise and boost your debt repayment.
Snowball: By this method, you pay your smallest debt first, moving on to the immediately bigger debt, and eventually establishing enough momentum to pay off the sizeable debts.
Avalanche: This is the opposite of the snowball method. Pay off your debts with the highest interest rates first. This will help you pay less interest over the course of your debt payoff. In addition, saving more money on interest means you’ll emerge debt-free faster.
Consolidation: This is a strategy to club diverse long-standing debts into a single new one, preferably at a lower interest rate. Ideally, this strategy makes your debt repayment more manageable. If you pick this method, make the most of balance transfer facilities on Credit Cards and Personal Loan balance transfer.
Management: Only opt for this method if you’re faced with a mountain of debt. This involves negotiation for reduced interest rates or payment amounts. Consider the two possibilities that emerge here.
In the first one, the debt amount is reduced. In this case, because you’re paying a partial balance instead of the total you owe the lender, your debt will likely be treated as debt settlement, which is typically regarded as a negative factor on your credit history.
In the second scenario, the lender might reduce your interest rate. In this case, you’ll typically be expected to repay the outstanding balance in full. If you continue making payments as per the new terms, you’ll be spared of a negative impact on your credit history.
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If you’re confused about which to choose between debt consolidation and debt settlement, we’ll tell you how to go about making an informed decision.
Choose debt consolidation only if you manage to secure a lower interest rate than your existing one. Remember that this is applicable only when the debt you’re trying to repay is a manageable one. This method helps you save money and pay off your debts sooner, besides reducing the number of debts you are juggling.
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As opposed to debt consolidation, debt settlement is rife with risk and should only be your last resort. This involves negotiating with your creditors to reduce the overall debt and accept a lump sum amount instead. If convinced of your complete inability to repay the debt, your creditor can agree to waive off a percentage of the total due amount in exchange for a lump sum.
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Debt settlement works only if you can’t repay your debts at all, thereby compelling you to withhold payments to your lenders. Bear in mind that debt settlement is only applicable to unsecured loans, i.e., loans against which you haven’t provided a collateral or security.
In the event that a loan or any other debt is written off as settled, it is recorded in your credit history for over seven years. Moreover, it is viewed as an unfavourable credit behaviour, besides pulling down the borrower’s score by 75-100 points and damaging his/her chances of securing credit in the future.
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If you’re unable to meet your monthly payments, you might come across to creditors and lenders as financially unstable. Not only will this bring down your Credit Score, but also harms your credit worthiness, thereby ruining your credit reputation.
Additional Reading: Why Your Debt-To-Income Ratio Is As Crucial As Your Credit Score
If you’re swamped in debt, your primary concern should be to set yourself free as fast as you can. The only way to do so is by paying off as early as you can. Once debt-free, you can begin aligning your budget closely with other financial goals!
In need of financial guidance? We are more than happy to help!