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Nobody wants to be caught up in debt. But in today’s world, people take loans or borrow money in order to deal with emergencies and also meet day-to-day expenses. Businesses borrow huge amounts of money, and when they do not make enough profits for the fiscal year, they end up spiraling over their loans. As a result, they exceed their repayment capacity and get into a debt trap. At a certain point of time, such firms may close down. You can see people struggling to pay back their debts and undergoing a lot of stress. When you are indebted to someone, you will feel emotionally obligated to that person. Debt will drain your resources for years to come. So, how to get out of debt? If you follow the below guidelines, you can get out of debt easily. Here is a step-by-step guide on how to get out of debt.
- Prepare a Financial Inventory
Make an accurate estimate about how much amount you have against each of your loans – personal, home improvement, vehicle, credit card, education, jewelry, and so on. Then open an excel spreadsheet. List all the loans that you have along with the outstanding amounts, outstanding time left to repay, and the interest rates. Then match against your net income and decide how you are going to go about paying your loans. Making notes will help you in coming up with a plan.
- Identify the most expensive loans
Identify which loan is the costliest, and you can repay that first. For example: your debt may be really burdensome due to the high rates of interest that you pay on credit card bill payments. In that case, you can take a personal loan with lower interest rates and use that money to repay your credit card debts. You can then go about repaying the less costly loan. You can identify credit card lenders who charge lower interest rates on credit cards and purchase from them. Sometimes, you can sell your assets to service a loan. But you should do this if you have alternative sources of funding for emergencies.
Tips: if your debt has gone to a collection agency, then you should consider repaying it first. Because collection agencies employ ruthless tactics to recover debts from you. These will affect your emotional well-being.
- Cut Down on Spending
When you are already in debt, you should try to lessen the financial burden by cutting down on unnecessary expenses. Are you a big online shopping buff? Do you order food all the time, do you frequent restaurants and go out often?. Well! you can eliminate all these unwanted expenses and many more for the time being and concentrate on servicing your loan. Plus, these unessential expenses may push you into additional debt.
- You can Go in for Debt Consolidation
You can not use all your monthly income towards repaying loans. Household and other mandatory expenses are there obviously. It will be very difficult to manage multiple debts and to pay many EMIS.So, you can go in for debt consolidation. Consider taking a personal loan that will equal the total amount from all your debts. A debt consolidation loan will help you channelize your numerous debts into a single account. But do not take up a debt consolidation loan if the amount borrowed is less than the total outstanding amount you have from all your debts. Also, the interest rate should be reasonable. Otherwise, you will only be adding to your financial stress.
- Make the Minimum Payment Towards Each of Your Loans
Make minimum payments towards each of your debts. Then go for the smallest one on your list and repay this loan fully. Then, you can move on to the next smallest loan on your list. Continue making minimum payments towards the rest of the loans and eliminate the next smallest loan. Continue doing this, and you will find that you will have a lesser number of debts to fulfill and also that you are left with more money to repay your smaller loans with time.
- Try to Pay More Than the EMI Required Whenever Possible
It is good to stick to your loan tenure, but it is wise to pay more than the EMI at times when you have money. In this way, you may even avoid getting into debt in the first place. Because, if you can prepay some of your loans before the required tenure, then you will have more money left towards paying the EMIs for subsequent loans that you are going to take. Also, you can avoid or lower the interest accumulation on the principal amount if you prepay the loan. T
- Build an Emergency Fund
Build an emergency fund. Even a small amount of savings in your account will help you handle urgent expenses better. You do not have to go in for payday loans or use your credit card to make the payments. So, build a cash reserve that will come in handy.
- Keep Yourself Motivated
Sometimes, you may have to handle emergency expenses, which will not allow you to continue with your credit or loan repayment. In that case, get back with your repayments as soon as possible. Don’t lose heart and feel demotivated. Bounce back and start repaying your debts again.
Debts are difficult to handle and keep you under pressure all the time. But, following this step-by-step guide on how to get out of debt can help you to relieve yourself of debts.