A Debt trap is not a good thing. We can relate to the struggle to get out of it. It requires a conscious and focused effort of making a list, tracking your expenses, consolidating the debts and making changes in your spending so that you do not splurge more than your income.
What is the best way to get out of Debt?
Getting out of debt requires discipline. At multiple levels. You will need to be disciplined in your spending, disciplined in paying your bills on time and disciplined to follow through the steps outlined here.
We have given below a six-step guide to help you get out of debt as fast as possible:
1. Finish off Smaller Debts First
Every debt has a string of charges involved starting with the interest on loan money, processing fees, pre-payment charges & so on. Not to mention the burden of maintaining a debt account, tracking the due dates and making the payment. Hence if you have multiple debts, make a list of all of them and sort in the increasing order of pending amount. Thereafter look at the top 1 or 2 debts to see if you can quickly close them in a few months by making more than required payments.
2. Consolidate when possible
Multiple loans are difficult to track, just like multiple credit cards. And if you missed any one of the due dates, you will be slapped with severe late payment and finance charges + taxes. In order to avoid that, explore if you can consolidate your debts at one or two places. This applies more to items which are towards the bottom of the list created in step 1. You can either avail more loan from one of the sources to pay off the others or opt for outstanding balance transfer facility available for some financial institutions.
3. Switch to lower rates
There is stiff competition in the loan market. Banks and NBFCs are trying to outbid each other in order to acquire more customers. There is always one or the other new schemes which can lower your interest rates. Keep an eye out to see if it can benefit you substantially. But also bear in mind the processing fees involved . Also dont do it too frequently or when the loan is nearing the end as it will lead to unnecessary botheration without significant financial benefit.
4. Track your Expenses
Next step is to start tracking your expenses. It is a sound financial practice and more so if you are in a debt trap. Tracking expenses will help you understand the difference between your expenses and income, which is the amount you can split between savings and payment of your debt. These days there are many apps available which simplify the task of tracking expenses. They also provide an idea of your average monthly expenses and also which category is consuming most of your budget. Among those apps, Finart is worth mentioning. It is simple, secure and easy to use. Keep a budget for each category as well as an overall monthly budget
5. Never pay late payment or Finance Charges
When you have multiple debts, it also means multiple due dates and bills. Failing to pay the EMI or minimum amount due can result in serious charges which can derail your recovery process. Make a list and ensure that you are never late for any payment due to negligence. Set reminders or use apps such as Finart to give you automatic due date reminders.
6. Continue to Save a Minimum Amount
Whenever you have a positive difference between income and expenses, you may be tempted to use the full amount for paying your debt. This may not be completely wise. Always keep a certain amount of saving fund or an emergency fund which can be used in unforeseen circumstances. We recommend it to be at least 10% of your income. Use the remaining amount to prepay your debts.
Once you are fairly our of debt, checkout this advice on living a debt free life