We all prefer to live life in a comfortable manner. We don’t only want our basic needs to be fulfilled but we also wish to see our dreams come true. In order to live these visions many people land up taking loans or increasing their credit card dues. Although loans are an easy and quick way to get access to a huge sum of money, it might prove to be detrimental for your financial health, especially if you find yourself unable to make the monthly repayments. Having a large debt or having a high debt-to-income ratio could have an adverse impact on your borrowing capacity as well as your financial health. You see, most banks would prefer giving loans to borrowers who have less debt in their personal balance sheets. Loans and financial obligations must always be taken seriously and repaid in due time as any default on the payments can harm your credit rating and ability to seek loans in the future.

We are of the view that taking a loan is not a bad thing, as long as you know your means to service it. In today’s competitive and materialistic era many often seek a loan to fulfil some of their financial goals in life such as buying a dream home, a car, fulfilling children’s education needs, starting own business, amongst a host of other financial goals. Even during a financial emergency in the family etc., people tend to take a loan as they might not have access to a huge pool of money at a time when they need it. And we appreciate the fact that having debt in your financials is sometimes inevitable and not in your hands.

However, what you can and must do is endeavour to remove or reduce your debt amount from your portfolio. The next question popping in your minds is how can I do this? Well, consider the following points, which can help you even while you are stuck knee deep in debt:
 

• Assessing your Debts: The first step towards reduction or elimination of your debt should be to evaluate all your financial obligations. Hence you must first note down all your debt obligations on a spread sheet or a piece of paper with all their conditions (such as term, interest rate, default penalty etc.). This will help you get a better understanding of all your debts and the nature of their payments. You must determine which debt payments are burning a hole in your pocket. For instance, you might have certain credit card dues, which bear a relatively high rate of interest. For the early extinguishment of your debt liabilities, consider repaying these debts first. You can repay the high interest loans with low interest ones. This will help you save money on interest payments. Create a plan to repay your dues and classify the ones you will need to clear first. This will give you a clear picture of your future course of action.
   
• Renegotiation with Creditors: Renegotiate terms of your loan or mortgages with your creditors who could be individuals whom you owe money to or even companies and banks. The latter may also be willing to lower the rates or extend the loan repayment tenure in certain cases. Hence you must ask them, as there is no harm in trying. If they are extremely rigid and are not willing to renegotiate at all, you may also consider shifting your home loan or any other debt that you have with another lender who might offer you better terms.
   
• Create a Budget: Analyse your monthly inflows and outflows. If your outflows leave you with very little to save and repay your debt or worse with no money at all, then it is high time you started monitoring your spending habits. Establish a monthly budget for all your expenditures and be determined to follow it. Curtail all the unnecessary expenditures and save wherever you can. This might mean reducing all the outings and even rationalising on the necessities such as food, electricity and telephone bills etc. Although you cannot stop purchasing necessary items, be a smart customer. Purchase discounted items, use coupons, negotiate with the shopkeeper, and plan all your shopping trips so that you can save on the transportation costs. It goes without saying, don’t add on to your debt by shopping more on credit cards etc. Having extra credit can sometimes create a feeling of having access to large sums of money and can lead us to buy things that we really can’t afford. Keep track of every small expense, as it is these small expenses that often amount to big bills.
   
• Additional sources of Income: In dire times, it would be prudent to start working part time as well apart from your full time job. Also encourage your spouse to find a job or a source of income if he/she is not already doing so. This will boost your monthly inflows and you will find yourself with larger sums of money to save and pay-off your debts. It will also be wise to explain to your children the financial situation of the family and motivate them to contribute to the family earnings by cutting down unnecessary expenses such as buying video games, toys, extra electricity usage and so on. This will also make them understand the value and power of money and will lead them to use money efficiently even when they become older.
   
• Utilising Windfall Income: As we have discussed in one of our earlier articles, windfall income is the amount that could arise out of lottery winnings, lawsuit judgments, large inheritances, divorce settlements, insurance settlements, or retirement packages amongst a host of other factors. If you have received any windfall gains then instead of deploying it elsewhere, first utilise the same in removing or reducing your debt obligations. You might have dreamt of using this money for fulfilling some other wishes, however it would be wise to first boost your financial health in order to meet your other financial goals in life.
   

Living debt free is not an unachievable dream. All it needs is some practical steps and perseverance on the part of the borrower. As Dave Ramsey, a personal money management expert once said, “Live like no one else now…so that you can live like no one else later!” Hence if your financial condition is giving you sleepless nights, it’s never too late to put in place certain defence measures.

However, if you are just beginning your financial life, remember that rather than making fences later it is prudent to be well informed right from the beginning. Hence one should be extremely cautious while borrowing debt. Keep the following points in mind before you blindly jump into the debt pool:
 

• Ascertain whether you truly need the loan. Can you post-pone your requirements and wishes or is the need for funds really pressing. If yes, then determine the amount that you can afford to borrow. It is imperative to check whether you can afford to repay the EMIs of the loan in the future.
   
• Do some window-shopping for an appropriate lender. It is wise to find out which lender is offering the most suitable terms of agreement at an affordable interest rate.
   
• Read all the fine print and other conditions attached to your loan agreement. This will not only help you determine the suitability of the loan but will also avoid any manipulations by the lender.
   
• You should be certain about the tenure within which you desire to repay the loan. Don’t get carried away by long tenure loans, which have lower EMIs especially if you can very well repay the loan amount in a shorter duration. Long tenures would mean paying more interest and a long working life as well.
   
• Every lender will check your financial statements and credibility before dispatching you the loan amount. Hence it is prudent to check your credit score yourself and rectify any errors you can before approaching a lender.
   
• Lastly, make sure you pay all your installments when they are due without defaulting to avoid disrupting your credit history
   

PersonalFN is of the view that instead of letting your financial obligations make all the major decisions of your life, you must take corrective actions before it gets too late. Also never be reluctant to seek the guidance of an expert if you feel matters are getting out of hand.

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