GETTING OUT OF THE DEBT TRAP
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It is not possible to get out of a debt trap in
a day, as it takes time and requires effort.
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It requires careful planning, disciplined
attitude, lifestyle changes and sacrifices.
1. Prioritise your
debt repayments
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Make a list of all your outstanding debts and
loans.
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Decide which of these you need to get rid of
first.
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Move from the costliest loans to the cheapest.
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The normal ladder to get out of a debt trap
should be
o Credit
card payments, being most expensive at 35-40% interest a year.
o Personal
loans, with 18-24% interest a year.
o Consumer
durables loans, with 15-20% interest a year.
o Vehicle
purchase loans, with 12-15% interest a year.
o Education
loans, with12-13% interest a year, but with tax benefits.
o Home
loans, with 11-13% interest a year, but with tax benefits.
·
If the credit card dues are huge for payment at
one go, ask the credit card company to convert it into a personal loan for
paying them through 6-24 EMIs, at about 18% interest a year, as this amount
will eventually be far lesser than that paid while rolling over the balance.
·
For clearing your personal, consumer durable and
vehicle loans, prepay them as soon as possible by considering the highest loan
tenure first.
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Before prepaying education and home loans,
consider your own tax benefits first.
2. Consolidate debt
and leverage your assets
·
If there is a cash crunch, taking a cheaper loan
against your assets, to repay a costlier debt, is always better.
·
However, if you are not disciplined, the new
loan will only increase your debt problem.
·
You can borrow to pay high-cost loans by leveraging
your various assets as collateral, such as
o Property,
up to 50-70% value, at 16-17% annual
interest
o Gold,
up to 65-80% value, at 12-15.5% annual interest
o Shares,
mutual funds and securities, up to 50% value, at 18-20% annual interest
o Insurance/Ulip
policies, up to 50-85% value, at 16-17% annual interest
o PPF,
up to 30% corpus, at 2% rate above your PPF earning rate annually.
3. Liquidate
investments
·
If you have stock and mutual fund investments,
or gold holdings, it may be a good opportunity to book profits and use the
proceeds to bring down your high-cost debt.
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You can also liquidate other low-yield
investments to pay-off high-cost debt.
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You should first sell investments where the
yield is lower than the interest you are paying.
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You can also sell-off non-performing mutual
funds and loss-making shares to clear-off debt.
4. Cut down expenses
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If you want to effectively cut down on your
debt, you also need to make some lifestyle changes.
·
It is not advisable to compromise on certain
mandatory expenses, such as children’s school fee, or basic food or living
expenses.
·
However, you can reduce family outings,
telephone and electricity usage, car expenses, etc.
5. Seeking debt
counselling
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If mounting debts and unpaid EMIs are giving you
sleepless nights, it’s time you sought professional help.
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There are several debt “de-addiction” centres,
set up by banks, allied bodies and private ventures, who help individuals, work
out strategies to repay their debts and advise them on avoiding such situations
in the future.
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The debt counselors are usually retired or
existing bank employees, who know the functioning of banks and can guide you
towards a solution, as they can foresee trouble even before it starts pinching.
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A debt counselor examines all the options you
have and then suggests the most feasible one.
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A debt counselor is no different from a doctor.
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Give him the complete picture without hiding any
information if you want him to diagnose the problem correctly and suggest a
suitable remedy.
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Debt counseling centres require you to fill up a
detailed form, which includes personal information, income details, expense
break-up and existing assets.
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A personal interaction with the borrower opens
up a lot of things which he may forget to mention otherwise.
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Modern debt centres offer a tech solution for
advising somebody from a distant location, by interacting with them through
e-mail and telephone and, if required, have an Internet chat with them.
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Be wary of conmen masquerading as credit
counselors who will promise to get your dues settled for a small fee.
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However, they adopt unethical practices and you
may end up with a poor credit report due to the settlement.