7 Ways to Avoid Taking Loans

Certain loans can help you achieve your dreams at an early age, improve your credit score, instil financial discipline, and provide tax benefits. Home loans and education loans are such essential loans that are generally considered 'good loans' as they help you manage your financial requirements and provide you with many benefits at an affordable interest rate. So, we can safely say that not all loans are 'bad loans', and you do not need to avoid taking all types of loans.

However, taking loans that instead of helping you improve your financial situation, make your life financially stressful, are considered as 'bad loans'. Availing of personal loans and excessive use of credit cards and credit apps are generally considered 'bad loans' as they can create a debt burden. But taking a high-value home loan or car loan more than your repayment capacity can also turn out to be a 'bad loan' in the future.

Such bad loans can make you stretch your budget and put you in a financially uncomfortable situation that may even lead to a debt trap. This article elucidates 7 ways to avoid taking such loans and keep you on the right track to financial wellbeing.

1. Prepare a budget and stick to it:

The primary reason why many individuals fall into a debt trap by opting for credit card loans, personal loans, app-based instant loans, etc., is that they cannot control their urge to splurge. Bing-borrowing has become a thing amongst young consumers who keep borrowing to buy expensive products and services that they cannot afford with cash.

A monthly budget can help avoid such impulsive purchases. Preparing a financial budget and spending in line with the same is an old yet proven method to avoid overspending. You can divide your wish list into wants & needs and short-term & long-term goals.

Whenever you feel the urge to buy an expensive product/service, with or without a loan, try postponing the purchase by at least a month. If it was an impulsive purchase, you might not even think about it after a couple of weeks and probably feel proud of yourself for not spending at that moment.

2. Make a financial plan for your big purchases:

It is crucial to make a financial plan for certain financial goals like buying a house or car, a child's education, a child's wedding, a family vacation, etc. In the absence of a solid financial plan for such important goals, you may end up paying high interest on the loans and put yourself in a financially challenging situation.

Therefore, it is advisable to start preparing for your financial goals well in advance. Here's an example of how paying a larger down payment for your home loan can save you a substantial amount on the total interest outgo.

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Making a robust financial plan for each of your financial goals will not only help you avoid loans but also instil financial discipline that will go a long way.

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3. Make a contingency fund:

Life is unpredictable, and an emergency can knock on the door at anytime. Emergencies like a sudden need to undergo an expensive medical treatment or the loss of an earning member in the family can make you avail of high-cost loans like personal loans.

Currently, when there is still a threat of covid-19 and increased uncertainty in the job market, making a provision for contingency becomes the most important task you need to do for yourself.

While there is no thumb rule on how much should be the contingency fund, it is best to save at least 12 to 24 months of your regular monthly expenses, including loan EMIs and insurance premiums. It makes sense to sensibly figure out a sum of money that will provide you with a safety net. In a difficult phase of life, this fund will help you sail in rough seas.

4. Use cash wherever possible:

Nowadays, individuals can avail of loans with a few taps on the phone. This easy access to credit facilities encourages reckless credit spending habits among millennials. They tend to buy things they do not even need. However, the same people will most likely skip those items if they have to pay with cash instead of a credit card/app.

Besides, many millennials prefer to spend through their credit cards and credit apps, even for everyday purchases, which they can easily afford to pay through cash. It is difficult to keep track of your credit spending when you use it for several small purchases. These small purchases can add up to a huge debt if you continue spending recklessly and do not make repayments on time. In the worst scenarios, you might have to take a loan to clear your credit card and credit app dues.

Therefore, it makes sense to use cash wherever possible, for small as well as big purchases, and opt for loans and other credit facilities only for genuine reasons.

5. Do not overspend on your credit card:

A credit card is a convenient tool to manage your finances as it opens a new line of credit for you. However, since you do not have to spend the actual money from your pocket, you tend to spend more than your budget, thinking you will balance it in the next month. The cycle continues, and credit card holders continue creating a debt which later becomes challenging to repay.

To avoid this, it is essential to limit your expenditures and try not to use credit cards as much as possible. If you think you will not have control even after setting a limit for yourself, you should set the spending limit on your credit card through net banking or by logging in to your credit card account online. The credit card will deny any spending more than the limit set by you. You may also consider freezing your credit card unless and until it is indispensable.

6. Pay your credit card bills in full:

While some credit card holders create debt by spending more than they can afford to repay, some others genuinely forget the due date, especially those who hold multiple cards.

Whatever could be the reason, if you fail to repay the full bill amount on or before the due date, the credit card provider starts charging you a high-interest rate from that very date until the entire amount is repaid. The interest rate and late payment charges are usually very high on credit cards, which ultimately increases the outstanding amount.

When repaying the dues, some cardholders choose to pay only the 'Minimum Amount Due'. However, they get charged interest on the unpaid amount until they repay all the due amount, which further increases your total credit card dues.

Not being able to make the entire credit card bill payments is a sign that you are not in good financial health. If such a situation continues, the high interest rate and late payment charges can make your credit card outstanding amount unaffordable to repay, and you may end up taking a personal loan to clear it off.

Therefore, it is best to always pay your credit card bills in full on or before the due date right from the begining. It is not advisable to make credit card purchases unless you have a repayment plan intact.

7. Research before borrowing:

When you have to borrow for certain financial requirements, it is a good idea to do thorough research and choose the lender carefully. Make it to the point that you compare different lenders on several criteria, such as interest rate, processing fees, customer service, loan approval process, etc.

Availing of any kind of loan is a long-term commitment. Choosing the right lender will help you save on the total loan cost. While you can choose to transfer the loan later, it might not always be a feasible option for you. You will have to pay the processing fee to the new lender, prepayment charges to the existing lender, and spend more than what you would save through a balance transfer.

To conclude:

While being debt-free gives a sense of good financial health, it is not necessary to be completely debt-free. Some loans like home loans and education loans help you achieve your goals faster and manage your finances better. As discussed, you may not be able to avoid certain loans, but you can choose the right lender and try to repay it as soon as possible. Also, robust financial planning can help you achieve your goals within your expected time horizon and reduce your debt burden.

Warm Regards,
Ketki Jadhav
Content Writer