Managing Debt effectively - 5-point guide to reduce your loan tenures

For most of us being in some form of debt is just a fact of life. Credit cards, overdrafts, personal loans, car loans and home loans have increasingly become easy to get and, not surprisingly, many of us have at least one loan. 

While some of us have only foot in the debt pool, an alarming number of people are drowning and struggling in a debt trap. 

Budget

The first step is to work out where you stand. Take stock of how much money is coming in, and importantly how much is going out.

Work out how much you owe, who to, and how much you need to pay each month. Identify your most urgent debts rent or home loans, school fees and tax are called priority debts as there can be serious consequences if you do not pay them, and so they should be paid first.

Create a budget by adding up your essential living costs like food and housing and taking these away from any income such as your wage or other incomes you receive.

Stop borrowing 

The best place to begin to turn things around is to stop making them worse. Stop borrowing money. Borrowing more money simply to pay off the running costs of other debts will eventually sink you. Don't jump into a so-called "consolidation loan" without carefully considering what you are getting yourself into. They offer to take away debt worries by shifting all your existing loans into one "easily affordable" loan.

Extra Income

See how you could boost your income. Try to prioritise your expenses on a day-to-day basis. It’s important to take some time and ask yourself whether something is important for you and how high it is on your priority list. If an item that is not needed by you is high on your priority list, maybe it’s time to rethink your priorities.

Moreover, spending on luxury items instead of economical alternatives can lead you into a debt trap. Budgeting and setting your priorities right can help you go a long way in managing your debt and finances.

Build an Emergency Fund

Start saving money every month, you should be banking 5% of your income into a fixed deposits (FDs) account.  Then in time of an emergency you can take a loan against fixed deposits (FDs). 

If you have an emergency fund at the right time, you might not fall into a debt trap. A debt trap typically starts, where you keep borrowing to pay one amount after the other. Also, people usually borrow when they are in sudden need of a substantial amount in cases of emergencies. If this cycle is broken in the initial stages itself, you can avoid a debt trap.

Always clear your dues on time

The first step to avoid a debt trap is by clearing your credit card bills and loan EMIs on time and in full. Paying just the partial amount or the minimum amount due in case of your credit cards can seem tempting at the time; but carry the same behaviour for very long and you may find yourself in a debt trap.

If you think you cannot pay your debts or are finding dealing with them overwhelming, seek support straightaway. You are not alone and there is help available. A trained debt adviser can talk you through the options available.

Harish Parmar's SingleDebt programme is particularly intended for people who are struggling with debt and are looking for a reliable way to pay it off. It harmonises the connection between lender and borrower with the goal of developing organised financial solutions and products that are advantageous to both the individual and the provider. 

He also suggested ways to attain debt freedom "Financial freedom refers to a state of financial well-being where you don't struggle for a living or require extra income to cover your living expenses," he Parmar noted. 

You Sure Shot Guide to reduce loan tenures 

Pay your loan in Lump Sum

It is worth to start paying extra than your usual payment cycle. It will help in reducing the risk of putting extra interest charges on your loan. A lump sum amount can only be the option when you have good saving and financial back up. 

Try to pay the principal amount

This can help to lower your burden of paying extra and more loan.

Invest in high returns

This could be the best way to avoid falling in extra interest charges. Investment in fixed deposits, mutual funds & other kind of savings that has high return which can help you to source your loan and free you up from the major tackle of debt. 

Higher down payment

A higher down payment will combine less interest rate so that you don’t have to pay much. In addition to reducing your EMI, this will also allow you to save a lot in the long run.

Step-Down EMI plan

In this scheme, there are banks and non- banking financing companies that provide customers with options of a Step-down EMI plan. 

According to this plan, when a borrower takes a loan, they have to pay a larger amount of EMI during the start of the tenure. As the time progresses, the EMI amount gradually decreases as the principal amount decreases after each month. This plan can help reduce the interest burden during the later part of the loan tenure. 

Prepayment method

Apart from monthly regular payments towards your loans, part/prepayment is the best way to reduce your loan tenure. It helps to close the loan account before the end of the loan tenure. If you make a lump sum payment, gradually your loan tenure will be reduced & you have the less chance of paying the higher amount.  

Balance transfer 

Under this type of method, you can pay off your balance amount by opting for a new loan from a new lender of banks with attractive terms which will help to lower your interest rates and your payment term.

Good debt and Bad Debt 

There are two types of debts, good debt, and bad debt. 

Good debt: It has the potential to increase your net worth or enhance your life in an important way. 

Bad debt: It involves borrowing money to purchase rapidly depreciating assets or only for the purpose of consumption. But borrowing money and taking on debt is the only way many people can afford to purchase important big-ticket items like a home. 

While those kinds of loans are usually justifiable and provide value to the person taking on the debt, there is another end of the spectrum that involves debt that’s taken on carelessly. While it’s easy to differentiate between these two extremes, some other debts are harder to judge.

There is a saying “it takes money to make money.” If the debt you take on helps you generate income and build your net worth, then that can be considered positive. Among the things that are often worth going into debt for are:

• Education
• Your own business
• Your home or other real estate

It is the good debt that will give you debt freedom in the long run.

Borrowers dealing with increasing EMIs due to consecutive RBI rate hikes

The Reserve Bank of India (RBI) will come out with its next bi-monthly policy review on December 7 at the end of the three-day meeting of the Monetary Policy Committee (MPC) beginning December 5. The Reserve Bank since May has increased the repo or benchmark lending rates by 190 basis points, to calm down inflation which has remained above its comfort level of 6% since January.

As a result, borrowers are affected by these rates, since their loan rates are up by 1.4%. This clearly puts more pressure on the common man as he tries to come up with an alternative payment method. Borrowing money from the bank will be a challenging endeavour for borrowers since it could adversely affect the cost of their financing. 

Even if a person takes out a loan for a relatively small amount, the interest charges will likely increase, making it more expensive for them to repay the loan. It is beneficial for someone with a small amount of savings and a fixed deposit. You can also choose options that can help to save your money and complete your payment cycle.

Attempting to transform the expanding financial sector so that people can repay their loans in an affordable way. By offering debt management, SingleDebt hopes to provide the Indian banking sector a fresh approach to money management. They have established structured financial solutions and products as a provider, which are advantageous to both the customer and the supplier. 

The organisation strives to offer straightforward, moral, and jargon-free financial guidance. All services, including debt management, business debt management, loan settlements, paralegal services, and legal advice, are now offered under one roof by this company. Harish Parmar opined, "There are certain ways you can help reduce your loan tenure. By making negotiations with bankers and lending companies, you can bring down the cost of your loan".

In order to pay off your loan debt smoothly, you have to navigate a challenging process. Inflation has forced us to spend more money because prices are going up. In addition to regular expenses, there are other major expenses too. For example, when you want to buy a new house or pay for your higher education, you always take a loan. A loan may be taken to reach a life goal or to meet financial needs; however, one must also keep in mind that a loan is also an additional expenditure, due to the interest that banks charge on the EMI. 

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