7 Ways To Get Out Of Loans
Friends getting stuck in loans is a very dangerous thing. And nowadays it is happening a lot. Because you get credit cards easily.
We have got a ‘Buy now pay later’ radium,-- people are not using these in a disciplined manner. If you find yourself or your family stuck in the web of a loan, then this blog might help you.
Seven such ways through which you may pay your loans slowly with minimal damage.
The First One, Prioritising
If you find yourself in the trap of bad loans, there are a lot of loans, there are personal loans, there are home loans, there are car loans, credit loans, then you must prioritize your loans. You have to prioritize the loans knowing that it is important which loan is causing you the most damage.
Mostly, these turn out to be short-term loans. These turn out to be the ones that don’t have any collateral. These turn out to be the ones that you buy not with an asset but without assets.
What do I mean by that?
If you are taking a home loan, then mostly to take a home loan you need to put your home on mortgage, you need to submit the paperwork for the home. The loan will be for a long duration, for 10, 15, 20, and 25 years, and because of this, its interest rate would be very less. Six percent, seven percent, eight percent.
But if you take a personal loan, to take the personal loan you didn’t put any mortgage. There’s no collateral. Maybe you have taken that loan for one, two, or three years. You might have taken out a loan for something that you wanted to buy, but you weren’t able to buy it, so you thought let’s take a personal loan.
Or, worse, your credit card, you’ve swiped with the credit card, but you weren’t at a stage to return the money in full. So, you started paying in rotation the minimum amount due. And the next thing you know, the amount for your credit card has become so big, because the interest rate for it is thirty-five to forty percent a year.
So, it is important that all your loans, first of all, are put in a ranking, and try to understand which loan is causing you the most damage. These are the loans with the highest interest amounts and the shortest duration. Because their quantum is very big, that means, EMI is very big. And if you don’t repay that loan on time, then your interest will keep increasing.
Number Two, Increasing Loan Tenure
Any long-term loans, a home loan, or any such loan, which is for five or ten years, or if you’ve taken a loan from a person whom you know, will trust you, he is after his money, but not at the expense of your peace. So, sit with them and increase the tenure of your loan. And this is a counter-intuitive suggestion because whenever you increase the tenure of your loan or increase the period to repay the loan, then you’ll end up paying more interest.
That may seem counter-intuitive, because, now, you are trying to get out of your loan, but what will happen is that, when you’ll increase the tenure of your loan, your EMI will decrease. And because EMI will become lesser, then hopefully you’ll have some more money that you’ll be able to divert towards the loans which are sucking your blood, that you need to end anyway.
Number Three, Raise EMI's Or Pay Lump Sum
When you can do it, the extra money that you’ll get, try to raise your EMI with that, or try to make one-time contributions. You must understand the math of EMI and loans. You can decrease the tenure of your loan and the loan amount significantly by increasing your EMI.
You can increase your EMI by 10% every year and make one-time contributions at the end of every year and this one process can help you a lot in getting out of debt and saving a lot of money.
Number Four, Refinance Your Loan
Whatever your loan is, especially, if it’s an expensive loan, then refinance it.
I’ll give a simple example, you got the bill for your credit card, and you are paying 40 to 50 percent, yearly. And it is criminal and it is suicidal if you are still doing that thing. What you can do is, let's assume, your credit card bill is one lakh rupees. And it's rotating, you take a personal loan.
That personal loan won’t be with collateral, But, it would be at a maximum of 13% to 15% or 16%. Which is significantly lower than the 35% to 40% that you pay for the credit card. You take the personal loan and pay the credit card payment in full. Now, you have to only pay the personal loan at a much smaller interest rate.
The same thing, if you have a personal loan that you’ve taken from a landlord, a friend, or a contractor at 20%, then try to take the same thing from a bank or someone else at a lower interest rate. You take the money and return it to the original lenders in one go. And then keep paying the new lenders the amount.
A lot of times it happens with the payments of a credit card, you’ll get a call that you can transfer the outstanding bills on your credit card to the other one. Very risky by the way, I do not propose it, but, if you don’t have any other choice, then this may still be a better choice to make. Because when you first transfer it, then they give you a rebate and you get an open offer, where the interest in that period is very less, and you can make the most out of it.
Net net, whatever is the interest amount of your loan, wherever you find a lesser than that, please take the money from there. and clear the original loan then try to clear this new loan, because that will lower the financial distress you have.
Number Five, Take Another Loan
Following this, as I have told you to pay a loan, if you have to pay another loan, then there’s no fault in that. You can take a loan from your friend or any relative to pay off the loan which has a higher interest rate.
Number Six, Prepare A Budget
If I tell you that, you need to quit cigarettes or alcohol, and that is something that you really enjoy or you are addicted to, then it won’t happen just by wanting, you need to work towards it, right? You will have to devote your mental, physical, and emotional energy to make that happen.
In the same way, if you are trapped in a loan, and you need to get out of it, then you will have to work hard towards it. And making a budget is the first step toward that.
Try to understand that a lot of people get trapped in loans because they didn’t plan the budget properly. They haven’t thought through everything that is going to happen and because of this, they are sitting now in this financial distress situation.
A great way to prepare a budget Is that the EMI for your loans should never be more than 30% or a maximum of 40% of your total income. And the minute it goes beyond that you know that you are doing something wrong.
If your yearly income or monthly income is 100, but more than 30 or 40 is going for EMI, then you are doing something wrong. And you have to pause on that.
The best way to budget… is what’s called the 50-30-20 rule.
- Out of your monthly income, a maximum of 50% should go into your needs. These are your needs, which include your EMI, your rent, and your food expenses. The needs of life, that you have to spend to live your life.
- Thirty percent towards your desires. And that is where you have to control yourself. You want to buy a phone, go on a vacation, you want to buy a car, buy good clothes, whatever it is, you need to adjust yourself within this 30%.
- And then the remaining 20% towards investments. Long-term investments, that is for your long-term purchases, buy a house, buy a car, education for kids, you want to go out, plans for retirement, whatever the case may be. But you are investing that 20% so that you don’t fall into the same situation that you are in right now.
You have to take this budget seriously. Because until you don’t do that, you are going to fall into this loan trap again and again.
And Number Seven, Settlement
The final and last resort Settlement.
Every loan provider carries a certain default in his mind. Even if it’s a big bank or a small person, for them, an NPA means Non-Performing Assets. There's a percentage for it, which is included in their business. It is usually in the range of two to four percent.
That means if they give 100 loans, they know that out of those two to four loans they won’t be able to repay it. And they have to settle them.
If you are at such a point, where you can’t think of anything, you can’t see anything, there’s no way to take a new loan, there’s no way to generate extra income and repay the loan, no way to increase the tenure of the loan, whatever the case may be. Then, the last resort could be a settlement.
The meaning of settlement is whatever your outstanding is, you go to them, you’ll confess that there’s no way you could pay the outstanding. And you ask them to settle at a smaller amount.
They are going to, of course, be very angry. They are going to do everything they can, to get their money. But, if they conclude that you can’t repay the loan, then they are going to settle.
How To Prevent Getting In Debt
To ensure yourself, god forbid, if this happens to you again, then to cause minimal damage to your family, you have to do two things.
Number One, Emergency Fund
You have to have an emergency fund. You have to contribute towards an emergency fund. That should be for at least six months or ideally twelve months.
So, whatever your monthly needs, whatever your monthly expenses are that you have to spend, for you to live your life, the expenses for six months and ideally twelve months, you need to have it.
This emergency fund has to be split into three parts, ten percent in cash, so whatever your emergency fund is, out of it, ten percent will always be as cash with you, twenty percent in your bank, it’s in your bank anytime. And seventy percent in your fixed deposit, that is growing slowly, it’s not beating the inflation but the whole purpose of the emergency fund is protection not growing the money.
So, these three will be the split of your emergency fund.
Number Two Is Insurance
Health insurance, for everyone in the family. And life insurance for yourself.
God forbid if something happens to you, then the worst thing you’ll do is leave your family in this. You can’t do that. You have to ensure that your life is insured. So, if anything happens to you that we never want, then your family could get such an amount through which they don’t need to earn for at least a few years.
And health insurance, in the past two years, if we have learned anything is that there were a lot of families that didn’t have health insurance. And because of covid, they were ruined as their hospital bill didn’t stop. You don’t want to be there.
So, for yourself, your immediate family, for your parents, health insurance is very important. Because you do not want to be spending money on hospitalization when somebody else can do it for you.
These seven ways to get out of a bad loan, these two things of an emergency fund and insurance to ensure that if you get stuck at that point then you and your family suffer minimal damage, is my way of trying to help you out of a bad loan.
I hope this was useful.
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