Simple Steps to Effectively Manage a Debt Repayment

Loans and credit cards help people meeting their financial needs. But in the longer run, if not managed properly they might get trapped in a debt cycle. With most of their income going in repayment of loans and very little in their savings account, the burden of debt tends to have a detrimental impact on the financial, physical, mental, and emotional health of the borrower. However, leading a debt-free life is not a far-fetched concept. It takes planning and discipline to become debt-free in a few years. Freeing yourself from debt can make your life better in many ways and here are simple steps to achieve that goal.

Steps to Achieve a Healthy Loan Repayment

• Plan your repayment before taking a loan:

With so many financial institutions offering loans at attractive interest rates in a hassle-free manner, people are tempted to take a loan to meet their financial requirements. However, it is equally important to plan how to repay the principal amount and the interest. Calculate your monthly expenditure and then take a loan that you can comfortably repay while making sure you are able to make some savings as well.

• Prioritise loan payments:

Firstly, understand your debts by making a spreadsheet listing the amount, interest rate, EMI, due date, etc. Now that you are aware of your financial liabilities, make it a priority to end your debts one by one. For this, you may have to cut down on your expenses to divert more cash towards repayment of loans. By the way, we are not talking about making crazy sacrifices but welcoming simple changes to your lifestyle, for example, taking the metro instead of hailing a cab can save you INR 150-200 more every day.  

• Revisit your repayment strategy from time to time:

Experts suggest that one should target repaying the bigger loans with the highest interest rates as they cost the maximum. Also, understand some loans that give a rebate on taxes are considered good debts. You should opt to pay them later and instead focus on paying the 'bad debts' like outstanding credit card dues, first. Always keep an eye on better alternatives in the market and opt for refinancing or consolidation of loans if it can save you more money in the long run.  

• Increase repayment when you can afford to:

If you get an appraisal or a second job, use the additional money towards repayment of the debts. Even if you are able to add INR 1000 to your existing EMI or are able to pay an additional EMI annually, you will be able to repay the loan sooner than earlier planned. Just make sure that the lender is not levying any charges for this.  

• Make use of existing investments for repayment:

Once you put a collateral on the line, your loan becomes a secured loan, which reduces the interest rate as it lowers the risk for the lender. If you have existing investments like a life insurance policy or PPF, you can use them as collateral to get a loan at better rates making the repayment process much easier. Similarly, you can take a loan against your gold holdings.

• Refrain from taking unnecessary loans:

Once you are neck-deep in loans, avoid taking another to repay the existing. It would trap you in a vicious debt cycle. In fact, even keep aside your credit cards as a precautionary measure.

• Don’t forget to build your savings:

In your effort of being debt-free, do not forget to make savings. Savings are necessary as they will help you in case of emergencies like an illness or a loss of a job. If you have savings, you need to neither panic nor take another loan to wade through troubled waters.

Advantages of Paying Off Debt:

Being debt-free makes your life better both financially and emotionally. Here are some psychological and financial benefits of paying off debt:

1. Psychological Benefits

• Once the debt is off your back, you are not stressed out about repayments and can stop worrying about paying bills along with EMIs.

• Carrying a huge financial weight on your chest can lead to depression, suicidal tendencies, weight-gain, migraine, high blood pressure, and other physical and mental ailments. You can live a relaxed life when you have no loans to repay.

• The side effects of the constant stress can have negative repercussions on your family life and relationships.

• Lastly, it does a world of good to your self-esteem as there won’t be any upsetting calls from lenders. 

2. Financial Benefits

• With no EMIs to pay, your entire income can be used for your personal needs and be spent on stuff you have been longing to do like renovating the house or taking a vacation.

• You can save more, strengthen your financial security and can even opt for early retirement.

• With no collateral at stake, there is no risk of losing your assets.

• Your credit score will improve automatically once you repay the debts on or before the deadline.

With strategizing, willpower, and determination, the borrower can achieve the goal of living a debt-free life and enjoy its many benefits. However, one cannot reach that stage in a jiffy. You need to realize that it is going to be a long process and it might become cumbersome to stick to the budget but you need to stay focused and committed for the sake of financial freedom. All the best!