Have You Borrowed Too Much? 4 Ways to Reduce Your Debt Problems

You are struggling to pay your loan EMIs. With the EMIs, credit card bills and regular expenses, you never seem to have enough. You can’t invest for your retirement or your kids’ higher education. What can you do to get out of this problem? It is not easy. However, avoiding self-goals and using a common-sense approach can help in a big way. In this post, let’s look at 4 practical ways to take care of your loan issues.

#1 Do not take on more debt. If you continue to borrow more, how are you possibly going to reduce your debt burden? The only exception is when you borrow to consolidate or refinance your existing debt at a lower cost.  Avoid taking on fresh debt to fund new purchases.

Do not borrow from friends and family either. Many times, this seems an easy way out. It may be zero cost or low-cost loan. You can continue with your undisciplined ways. However, this has a cost eventually. If you can’t repay on time, this can strain relationships and can have obvious social costs. Moreover, this does not reduce your debt problem any bit.  The only exception, as mentioned earlier, is to repay existing debt.

Remember, if you keep paying loan instalments in full every month, the debt automatically goes down. That’s how debt repayment works. The only way your debt will rise in the next month is when you do not pay the previous month’s bill in full or you take additional debt.

#2 Control your discretionary expenses. This is a low-hanging fruit. Don’t try to keep up with the Joneses.  Adjust with the reality. Control those urges. Stop impulsive purchases. Dine out less. Eat home cooked food rather than order on Zomato or Swiggy. Do not carry your credit cards to the mall. Use debit cards or cash. You can set a low transaction limit on your credit and debit cards. If required, uninstall online shopping or food ordering apps from your mobile phone. This requires discipline but it is much easier than it sounds (really!!!). These are minor lifestyle adjustments that can help. Remember, each time you swipe your card, you are taking a loan and your aim is to reduce the loan (and not increase it).

You can use the extra savings every month to expedite loan repayments (that reduces EMI burden) or invest for the future.

There are many non-discretionary expenses such as medical bills, education fee, groceries etc. that you can’t do much about. However, when you are struggling with debt, not controlling discretionary expenses is a self-goal.

#3 Use your investments wisely. Be open. Put those to use. Secured loans (gold loans, loan against property, PPF etc) can come at a lower cost and ease your repayment pressure. Note that you must use such proceeds only to repay existing loans. If you use such secured loans to fund new purchases, then you are going into a deeper mess.

Partial withdrawals (EPF, PPF etc) or outright sales (gold, stocks, mutual funds, fixed deposits) can also be considered. Remember loans don’t come cheap. If you are in a serious mess, an outright sale of assets (as compared to taking a loan against the asset) may turn out to be a better choice. For instance, if you have a loss of job, you may not have any money to repay any kind of loan. A lower cost interest loan may also not be affordable. In such a desperate situation, an outright sale is a better option since you will eventually have to let go of the asset if you can’t repay. Why pay interest unnecessarily on it by taking a loan against the asset? I understand it is easier said than done. Life is never so objective. And then there is hope. You may not have a job now but you may get one after a few weeks or months. You wouldn’t want to sell your family gold when you are uncertain. Be pragmatic and make an informed choice.

Stop doing foolish things with money. It makes little sense to own a fixed deposit at 7.5% p.a. or have investment in stocks when you can’t make more than minimum payments on your credit card debt. Credit card debt costs you 40%-50% p.a. There is little chance you will earn more than that with your investments.

#4 Seek professional assistance. This is for really messed up cases. There are debt management agencies that help you structure your repayments better. When you are in the thick of these debt problems, it is not easy to think straight. An opinion or assistance from a competent third party can bring much needed clarity. Even your financial advisor can help in such cases. They can structure a debt repayment strategy for you. These agencies can also negotiate settlement with the banks and make your debt more manageable. 

Leave a Reply