It is a legal as well as a moral obligation to repay your debts on time. It is quite a challenging job to handle debts and any form of mismanagement can affect both your financial and mental well-being. Though it is easier to manage small debts, it is difficult to manage long term debts. There are various ways by which you can get out of debts but in this context, it is important to consider that all the ways may not be suitable for everyone. However, if others can repay their debts on time, so can you. All you need is constructive planning followed by proper execution. In this article, some of the best ways have been charted out so that you can clear your debts.
Know your current situation- To get out of debts; you need to understand your present financial condition. There is a need to have a clear picture of your position. Gather all the information to do this- make a record of the statements of credit card bills, or loans, credit reports, and your credit score. Organizing the details would make it easier for the borrower to deal with the situation. Make a list of all your obligations that has to be paid along with its time-period and interest rate. This helps in determining the costliest debt.
Pay your debts on time- As it is a legal obligation to repay your loans, the borrower should maintain proper monetary discipline. Automate your payments so that the debts get deducted on time. Automated payments are the best because it doesn’t require you to remember the date of repayment and it automatically gets deducted from your bank account. Repaying debts on time has lots of benefits- you do not have to pay any extra interest, no penalties and the credit score remains unaffected.
Settle the expensive debt first- As you are aware of all the dues that need to be repaid, make sure you prioritize the costliest debt out of all. The costly ones have a high-interest rate and if it goes on pending, there will be a heavy accumulation of debts. The smartest way is to choose a debt that is expensive and charges you a high rate of interest. Try to settle this debt and once it is completely paid off, move on to the next expensive debt that you have. Another variation of this strategy is popularly known as the Snowball Method in which you need to do the opposite i.e. pay off your smaller debts first and then the bigger ones. There is a huge debate regarding which of the methods is the best one. It depends on one individual to the other because some might feel like repaying the bigger debts and some might love the feeling that they can clear off their smaller debts.
Make a budget plan- This is one of the most important steps for getting out of debt. Keep a note of the income and the expenditure. This helps in determining if you making too many expenses on unnecessary things. In this manner, the extra expenses can be curtailed and you will have money to save which can be used for clearing out the debts.
Consolidate the loans- Managing too many loans is a real headache and to avoid this, the smartest way is to consolidate them into one loan. This will give an idea regarding the total amount of dues and what needs to be paid every month.
Avoid too many loans- When the debts keep on accumulating, it creates a hefty financial burden on the borrower. One may need to obtain more and more loans to clear the previous debts. The overall debt can soon exceed the total income that you earn. Things may become worse if your loan amounts exceed this.
Stay away from economic shocks- Economic or income shocks are situations where the person doesn’t have an income to maintain his/her present lifestyle. Losing your job means no income. It becomes difficult to repay your debts when you do not have any earnings. So, the borrowers need to have sufficient liquid cash in hand to repay the debts. To be on the safe side, it is important to have a side hustle. Besides that, you should have an emergency fund to help you stay afloat even during such tough times. An ideal emergency fund should have an amount that would suffice you for the next 10 to 12 months, these emergency funds will help in repaying the debts and it will prevent you from taking any fresh loans, thus saving you from debt traps.
“Having a side hustle will help supplement your income”.
Increase your loan amount–With time, your income levels will go higher. It means that you can pay higher repaying amounts that will help in clearing out the debt much before the actual tenure. Use this prepayment strategy to get out of debt.
Find ways to increase your income– Do not rely on one particular source of income because there might be emergencies where the employer can take away your job. The best example over here is the ongoing pandemic situation (Covid-19) all over the world where people are losing their jobs. So it is a better option to have secondary sources of income. This helps you maintain your financial stability even without the major income source.
A good credit score is a sign that the borrower is good. Keep a track on your credit score so that in future you can get the best loans at the best interest rates. Nowadays, most of the lenders reserve certain special loans for those borrowers having an outstanding credit score. A credit score of 700 and above is considered an excellent credit score. Anything below this range would mean that there are lots of unsettled debts or you have been a defaulter. The borrowers need to understand that creating a plan is important and there are ways to get out of your debts.