How to effectively manage multiple loans and get out of debt

Here are some of the best strategies to effectively repay your loans and become debt-free at the earliest.

Stuck in a vicious cycle of never ending EMIs

For the average Indian, debt is a part of life - whether it is a home loan to secure a roof for the family, an education loan for one’s child, or a personal loan taken to tide over an emergency (such as hospitalisation). With multiple liabilities, it is easy to fall into a debt trap that will not only have a debilitating impact on your financial health but also adversely impact your creditworthiness for the foreseeable future.

If you find yourself stuck in a vicious cycle of never-ending EMIs, here is a six-point strategy on how to manage multiple loans.

1. Keep debt under control

The pressure of EMIs and high interest loans can create a huge strain on your financial and mental well-being if your debt is not within manageable limits. As a rule of the thumb, your total outlay towards all EMIs should not exceed 40% of your take-home income.

Also Read: 5 Money Behaviours That Can Push You Into Debt

2. Timely repayment of loans

Whether it is structured credit like a home loan or unpaid credit card dues, you need to be on top of your payment schedule and due dates to avoid extra interest burden and penalties. Missing deadlines will not only entangle you in a deeper debt trap but also have severe repercussions on your credit score, making it difficult for you to secure critical loans you may need in the future.

3. Rework your budget

Taking a closer look at your non-discretionary spending will allow you to prioritise expenses and probably find a way to save some money, which can be fruitfully utilised towards the timely repayment of your loans.

Also Read: Stuck In A Debt Trap? Try This To Be Free

4. Prepay high-interest loans

The amount you owe on a loan can easily snowball in the case of high-interest loans such as personal loans and credit card EMIs. If you get any extra funds in the form of an increment, bonus, commission, or windfall gain, utilise a part of the receivable to prepay high interest and/or small loans and bring your credit utilisation down.

5. Consolidate your loans

If you have multiple loans, servicing different EMIs and staying on top of your payment schedule can be challenging. Consolidation of loans is possible either by going for a top-up on an existing loan or a balance transfer on outstanding debt. Ideally, look to consolidate under one or two low-interest loans. This will not only help you save on interest cost but also give you more time for repayment, helping to improve your credit score over time.

6. Design an effective debt repayment plan

The best way to get out of a debt trap is to tackle one liability at a time. Look for opportunities to close high-interest and small loans first. Be sure to evaluate the cost benefit of prepaying a loan, especially if there is a foreclosure penalty. For other medium- to long-term loans such as car loans and home loans, opt for a step-up EMI that will allow you to pay more as your income increases.

Also Read: Tomorrow Makers' Guide To Becoming Debt-Free In 6 Months

Also, be aware of the general interest rate scenario, especially if you are on a floating rate interest plan. If the interest rates drop, don’t lower your EMI commitment; conversely, if the interest rates go up, see if you can find better terms and lower interest rates for a balance transfer.

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