Managing the finances aligned to one’s monetary goals is akin to walking a tightrope which includes exercising financial discipline, building an emergency corpus and reducing the debt levels.
With the advent of fintech, automation of the lending process, tech-enabled underwriting and prompt loan disbursal through digital modes, today, we all have easy access to convenient credit options. In certain cases, experts say this has resulted in a scenario of borrowers assuming higher debt burdens than is financially viable.
Nitya Sharma, CEO and Co-Founder, Simpl says, “Rather than landing into a debt trap, where one needs to borrow further to repay existing debt, it is prudent to avoid over-borrowing beyond one’s budget. Managing the finances aligned to one’s monetary goals is akin to walking a tightrope which includes exercising financial discipline, building an emergency corpus and reducing the debt levels.”
Understanding the real financial position
For optimal money management, experts say, it is of paramount importance to study the overall financial condition and track the expenses. This may be gauged from the monthly earnings, lumpsum corpus accumulated from investments and outstanding debts with regular repayment liabilities. Based on the above analysis, according to Sharma in case of excessive leverage, one could lower loans by settling existing debts, especially borrowings with high-interest outlays.
Reduce high-interest bearing debts on a priority basis
Credit card usage, vehicle loans, personal loans and gold loans generally carry a steep rate of interest. “It would be prudent to divert idle money or accumulated surplus to repay and close high-cost loans and unnecessary borrowings to reduce the overall monthly expenses. Another option is to opt for interest-free credit like Buy Now Pay Later whereby one can avail credit towards purchases and repay a consolidated bill across merchant categories during the credit period, without worrying about any additional interest charges,” explains Sharma.
Negotiate with the lender for favourable loan terms
Loans with huge borrowed amounts like home loans often have repayments spread out over a long period of time. While housing loans bring tax benefits, since the accrued interest and principal repayment components are distributed across a long tenure, one actually ends up paying a sizeable amount towards the outstanding loan, which often exceeds the actual amount borrowed. Therefore, experts suggest borrowers should negotiate favourable loan terms with the lender to lower their monetary outflows on loan EMIs. In case you have accumulated a corpus, you could discuss early debt settlement with the lenders and utilize your savings towards loan foreclosures.
Avoid payment defaults or payment delays
Failure to repay debt obligations on time or payment defaults carry high penal interest and would adversely impact the CIBIL score including one’s future borrowing capability. Sharma says, “Even in instances where only a soft credit check is conducted, without a major impact on the credit scores, like in the case of Buy Now Pay Later, adverse credit incidents involve penal costs and would reduce the credit limit available towards future purchase transactions.”
Thus, under no circumstances, should you skip the loan repayment date or delay payment of the outstanding amounts. In fact, you could also consider prepayment of debt rather than a postponement of repayment.
Borrow wisely
Sharma says, “Income is a monetary inflow and expenditures like repayment towards loans is a monetary outflow.” Hence, to strike a perfect balance in your monetary budget, adequate financial planning is crucial.
He further adds, “To achieve this, one needs to minimize expenses, especially discretionary spending and loans carrying high-interest costs, grow and diversify income avenues through earnings, savings and investing, increase income-generating assets and most importantly, pay off existing liabilities before taking on new debt.”
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