Finance & Accounting

5 Ways to manage debt burden

In today’s time loan disbursal has become much easier than what it used to be with the advent of financial technology companies and automation of the loan disbursal process by with the use of technology. Nowadays, people have better options of availing convenient credit options to such extent that the experts claim that borrowers are taking loans higher than their capacity to repay them off. Therefore, it is suggested that rather than inviting a situation of debt trap where the borrower takes further loans to pay off the previous loans, the borrower must avoid a situation of over-borrowing beyond what his pocket and budget permits. This piece of writing discusses 5 ways to manage debt burden for any person who borrows:

What are the 5 ways to manage debt burden?

The task to manage debt burden is simple enough if the following ways are adopted by the borrower:

Borrower must find out his real financial position

The first step before opting for a loan or debt, the borrower must first be aware of the real financial position to optimally manage his money. This further helps the borrower in tracking his expenses so that he can cut down the unnecessary expenses and significantly reduce the amount of debt that he intends to take. The borrower can gauge his real financial position from his monthly earnings, his savings, overall value of his investments and match them with the existing debt and regular repayment liabilities. On the basis of analysis made by the borrower, if he finds out that he has excessive leverage i.e. the profits made from the borrowed capital are higher than the interest to be paid on such borrowed capital, then the borrower can significantly reduce the amount of debt he intends to take and settle the existing debts especially the ones having high interest outlays. This is one of the most significant steps to manage debt even if a person does not want to take loan.

Pay-off high interest bearing debts on priority

There are certain debts that a borrower takes for his normal day to day expenses such as debts on credit cards, vehicle loans, gold loans, personal loans. These are usually high interest bearing debts which eat up a lot of borrowers’ money without making him realise it. Therefore, the experts advise that a portion of the idle money must be directed towards paying off these high interest bearing debts. This reduces the overall monthly repayment liability of the borrower and close high cost loans. There is an alternative to interest-free credit like schemes of buy now pay later where the borrower can avail credit through purchases and pay for the purchase through a consolidated bill during the credit period without the needs to pay any additional interest charges^[1]. This takes the borrower out of the trap of interest payments and manage debt burden in an innovative and efficient manner.  

Work out a favourable deal from the lender

The best way to manage debt burden is done at the initial phase of making deal with the lender. The make or break moment is at the time of working out a deal with favourable terms and conditions with the lender which can set the course of loan fairly smooth for the rest of the loan period. There are certain loans which have long gestation period for making repayments. On one hand housing loans bring along tax benefits but on the other hand the borrower ends paying excessively higher for the loan because the accrued interest and principal payment that has been spread over number of years. Therefore, the experts suggest the borrower to negotiate the best possible deal with the lender with favourable terms and conditions wherein the borrower needs to pay lower monthly payments as EMIs. It is also advised by the experts that in case the borrower accumulates substantial amounts of funds, then he should discuss with the lender for the early settlement of the claims and close the loan so that future earnings can be used to invest for garnering better returns.

A big no to payment delays or worst case making defaults

Timely repayment of EMIs without making any delays or defaults is an important step in a borrower’s attempt to manage debt burden. If the borrower fails to meet his debt obligations and make delays and defaults, then such acts carry a very high rate of penal interest and its impact is highly visible on the CIBIL score. This adversely impacts the future borrowing capacity of the borrower. Therefore, it is advised that under no circumstances should a borrower make any kind of defaults or delays on his repayment obligations. Instead, it is suggested that if the borrower arranges sufficient amount of funds to repay the loans, then he should do it to not just to save himself from more interest but also to better his CIBIL score for better credit opportunities in the future.

Inculcate the habit of wise borrowing

To mange debt burden the borrower must definitely inculcate the habit of borrowing wisely. The income from various sources that flows in with the borrower is called the inflow of capital and the mandatory monthly payments in the form of EMIs is called the outflow. In order to manage debt burden, the borrower needs to strike a fine balance between the two which requires proper financial planning.

To achieve such level of financial planning, a borrower needs to minimize the discretionary spending and payoff the high interest bearing loans on a priority basis and at the same time concentrate on expanding and diversifying the sources of income through saving, investing, acquiring income generating assets and most importantly close the existing debts before taking on any future debts. 

Conclusion

A combination of the above mentioned ways along with managing one’s finances in alignment to the borrowers’ goals is the way to manage debt burden. This requires walking on the difficult path of financial discipline, building a fund for emergency situations and continuously striving to reduce their debt levels. An important step which most of the people do not undertake is increasing the size and sources of income which can fasten and smoothen the ride of managing one’s debts. 

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