There has been increased focus on retail lending by the banking sector in India. But this has also led to a significant increase in household debt in the country. In fact, household debt grew from ₹3.7 lakh crores in 2016-17 to ₹6.74 lakh crores in 2017-18, according to the Reserve Bank of India.
This increasing debt means there are a large number of people are unable to save anything, despite having a stable income. But all’s not doom and gloom for those people who spend a large chunk of their money repaying debt. Here is how you can get out of the debt trap.
1. Create a Budget
Make a list of all your monthly expenses that can impact your savings. First write down the fixed expenses, such as electricity and water bill, your children’s school fees, grocery and medicines. Then, write down the discretionary expenses. With this, you can get an idea of the things you can cut back on to pay your mortgage or education loan. For instance, you could cut down on eating out.
2. Write Down All Your Loans
Before tackling the problem, get a good idea of the situation. For this, list down all the different types of debt you have, such as mortgage loan, car loan, credit card payments, personal loan, and education loan. Also, write down their detail, such as interest rate, EMI, payments left, in front of them. This way you also get a clear idea of which are the expensive loans. To calculate which is a more expensive loan, you would have to take the interest rate and principal amount into consideration. A mortgage loan might have a lower interest rate, but because of the principal amount, it would accrue a much larger interest than a credit card payment.
3. Try Negotiating Interest Rates
If you can manage to negotiate you interest rate to a lower value, you could come out of the debt faster. At least when it comes to credit cards, many lenders are willing to negotiate, since this means they wouldn’t have to run after you to collect debt.
4. Opt for Debt Consolidation
One of the ways you can start paying your loans is with the help of debt consolidation. In debt consolidation, a new, lower cost personal loan is taken to pay for a number of liabilities, generally unsecured loans. The interest rate of such personal loans is generally lower than credit card payments, which makes it great for clearing credit card debt. You could be paying between 36% and 48% interest on your credit card bill each year! Plus, you do not have to keep track of several different payments. This reduces the chances of you missing a payment.
5. Pay More than the Minimum
The longer you have a debt for, the higher will be the interest paid by you. So, whether you have a mortgage loan or credit card debt, try to pay more than the minimum amount. In case you have any extra funds at any time, try to use it to close a loan. This would allow you to shorten the tenure.
Apart from these, increasing your income by taking a weekend job can also be beneficial in getting out of the debt trap.