In this blog, we will discuss debt management – the fifth step of the beginner’s personal finance checklist. We are skipping the fourth step – expense management because we have covered it already here and here.
Understanding how to repay your existing loan efficiently will save you valuable time and money.
By reviewing your finances, you can decide which option to take to pay off your loans. Doing so will reduce your debt obligations and improve your credit score and financial stability.
Estimated read time: 3 minutes and 05 seconds
Hint: Managing and repaying your debt quickly feels like throwing useless things out to fly!!!
Buckle up, here we go!
Just like Ravan – King of Lanka, debt is not always evil. Often it acts as a booster and speeds up your journey towards your goals.
But there needs to be an oversight on debt. Because excess debt can take you on a downward spiral. Balance is key.
Think of your expenses and debts as if they were a company. If you manage them well, you will not go bankrupt. You need to keep track of all your financial transactions and ensure that you pay back what you owe.
If the loans help you build income-generating assets, that’s great. But if the loan is for depreciating assets like cars, gadgets, etc think twice about your repaying capability.
If you plan to take a loan for the first time, there are some things to consider beforehand. Read about them here.
For now, let’s focus on managing existing debt.
There’s a high chance that you or your family have taken up a loan for a car, education, marriage, business or emergency reasons. If yes, there are ways to repay it quickly and save a lot of interest money. Let’s discuss them.
Repay high-interest loans first:
According to the interest rates, make a list of your loans. Your EMI payments should be high towards high-interest loans like credit card debt and personal unsecured loans.
A home loan or student loan is likely to have lower interest rates while offering tax benefits.
Consolidate your loans using collateral:
Let’s assume you own a property and have a huge unsecured personal and credit card debt. You can take a new loan against the property and repay these high-interest loans.
Loans with collateral have a low-interest rate. You can also keep private vehicles, insurance policies, and investments, such as FDs, mutual funds, bonds, etc. as collaterals.
Increase EMI payment every year:
Increasing your EMI payments every year by even 2% results in quicker loan repayment and savings in interest. You can increase your EMI payment every year as you receive a salary hike.
Pay extra EMI every year:
Paying off 13 EMIs a year instead of 12 can make a lot of difference in interest payments and get you out of your debt pile quickly. You can pay extra EMIs based on your financial situation.
It is tempting to spend your bonus on gadgets or vacations, but getting out of debt is more practical. Remember, you also need to consider the market return, remaining debt payment and interest rate of the loan before paying a lump sum amount.
Negotiate for a lower interest rate:
You can try to re-negotiate a lower interest rate if your credit score has improved or the market interest rates have gone down. You might get lucky.
Transfer your loans to another lender:
You can consider transferring your loan if another bank offers a significantly lower interest rate. But check the prepayment charge and the new lender’s processing fees before making the switch.
Use your investments to pay off debt:
In dire situations where the interest rates are very high and unbearable, you can liquidate investments that are performing poorly for an extended period. Or you can stop your monthly investments till you repay the high-interest loan.
If nothing works, you need to cut down on avoidable luxuries such as eating out and going out on weekend trips. Lead a low-key life until you have repaid all your debts. You’ll get enough chances to make up when you are clear of them again.
If you buy things you do not need, soon you will have to sell things you need.Warren Buffett
In our following blog, we discuss income management – Why and How to Build Various Income Streams to Become Wealthy.
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