Smart ways to repay your debt
Being debt-free is crucial for every family in order to have a positive financial future. This should be done to avoid constant financial stress. The real problem here isn’t your bank balance or income level. It is the big dreams you’re giving up, when you stay in debt. Here are a few smart tips that help you get out of debt.
1. Do a Financial Reality Check
Not all debt is bad. Loans taken to build assets or enhance skills are good loans and will only add to the net worth of the individual. However, if close to half of your income is going into paying EMIs and if over a quarter of your income is going towards the payment of EMIs of non-mortgage loans and discretionary spending, it's a cause for concern.
2. Prioritise debt repayments
Make a list of all your outstanding loans and then decide which of these you need to get rid of first. Start by repaying the costliest loan, such as credit cards and personal loans. Credit cards outstanding are the most expensive, with interest rates as high as 40% a year. You should pay them off first. If you find it difficult to pay a huge balance at one go, ask the bank to convert it into a personal loan. Most banks would let customers pay large amounts in 6-12 EMIs. If the sum is big, they may even extend the payment to 24 months. However, even such personal loans are costly, with interest rates of 15-18 % a year. Nevetheless, this amount will be lesser than that paid while rolling over your credit card balance.
Personal loans should be next on your list. They are costly, with interest rates of 18-24 %, and should be repaid as early as possible. The bank may charge a prepayment penalty of 1-2 % of the amount, but it will be worth it if you have more than 6-12 EMIs to repay.
3. Consolidate debt
If some loans are cheaper, it makes sense to use them to bring down your interest cost. A loan against property, for instance, is available at 16-17 %. This is cheaper than a personal loan or a credit card rollover. You can also get loans against other assets, such as insurance policies, bonds and other securities.
4. Increase repayments with rise in income
One simple way to repay your loans faster is to increase the EMI with every rise in your income. Don't underestimate the impact of this modest increase. Even a small increase in EMI considerably reduces the number of EMIs you are expected to pay.
5. Liquidate investments
A smart way to bring down your debt involves booking profits on your stock investments or gold holdings. Similarly, you can liquidate other low-yield investments to pay off high-cost debt. If the interest rate on your bank fixed deposit is almost half your personal loan interest rate, it makes sense to knock off the FD to repay the loan.
6. Make lifestyle changes
It is often the little things that go a long way in keeping your finances in fine fettle. A lifestyle change is needed until all debts are repaid. This means cutting down on luxuries and unwanted spending.
Careful planning and a disciplined attitude will help you find your way out of any debt. It won't be an easy journey but, eventually you will realise that being debt-free can make a material difference to your life.
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