Loans when taken for productive use, can be a force for good. For example, it’s commonly agreed that loans should be used for education and business purposes.
Where things start getting hairy is when you start taking on loans without a clear idea of its purpose, and whether you’ll be able to manage the repayments.
Your first steps to living a borrowed life
If 80% of your income is going to repayments of your debts and loans, then you are likely to fall into the pit hole of debt ( this is especially so if you have absolutely no savings left.)
Let’s say you have a monthly income of $6, 000 to start with. You already have a $1,200 home loan, $700 car loan and a $100 insurance instalment to be paid every month. One day, you get a notification of a great cash back offer from a reputed online merchant and spent about $3, 500 on a smartphone, a laptop and some costly home décor items. You are now left with only $600 to meet your basic requirements.
If you keep up such spending habits for more than 4 months, you are bound to be overburdened by a hefty outstanding credit bill in no time. Paying just the ‘minimum amount’ for your credit card bill or doing a late credit card payment is a clear trap wherein the interest gets accumulated to such huge amounts that it may become absolutely impossible to come out of the trap with your mere $6, 000 monthly salary.
Major Causes of Unmanageable Debts
- Pervasive culture of consumerism and over spending on luxury items.
- Buying home, rents and over doing home remodelling.
- Educational loans.
- Failed business and business expansion loans.
- Auto loans.
- Credit card and personal loans.
Amongst all these major debt causes, credit cards and personal loans are the worst types. Buying things on credit has nowadays become a social norm, but, till the time you realize that you are maxing out on viable credit card spending, you have already fallen under the debt trap by not being able to pay the total outstanding credits and thus, eventually building up on high interest rates.
Personal loans, on the other hand, are short term loans that are capped at high interest rates. These are usually borrowed when you are already under a stressed financial condition and use services of a licensed money lender to pay your other debts. As a result, your total debt builds up with time and your salary would only be just enough to pay off the interest dues, and never the principal amount itself!
Why should/ shouldn’t you opt for personal loans?
There are thousands of third party moneylenders advertised on attractive, easy-to-use sites like Loan Advisor that are just itching to lend to you.
Borrowing money from money lenders is an effortless and an innocuous task. Even if you have a bad credit score, you can simply approach a licensed money lender on an online platform and get cash in your bank account in days (maybe hours!).
However, you must be financially aware.
These types of loans are usually capped at high interest rates and should only be contacted as a last resort.
While unlikely, if you do not approach a genuine money lender, you may also be frequently harassed, asked to split your loans, be a target for unexplained interest hikes and be asked to pay off administrative charges in excess.
Breaking out from the cycle
- Self-awareness: You really cannot get out of the spiralling debt cycle, until you honestly examine your financial situation. Keep a track of your earning to spending ratio and always try to keep your spending capped at no more than 40% of your total income. It’s advisable that you save at least 20% of your monthly salary.
- Pay outstanding balances on time: Did the ‘minimum payment’ mentioned on your credit card bill sound super cheap and easy to pay off? Well, everything good comes with a huge price. If you fail to pay the total outstanding amount, you would end up accumulating yearly interests of up to 36% on credit cards. However, if you are paying off your total outstanding balances on time, then you are actually improving your credit score and building up on future bargaining power.
- Impulse buying: Did you love that designer dress that you saw on Amazon that day? Well, just give it a second thought if you are already under a debt. While some cash back and discount offers can be highly tempting, impulse buying should be done only in case of emergencies.
- Save first: I highly recommend my readers to opt for a personal loan only when they have a secure backup. Keep savings like fixed deposits, stock investments and other liquidity savings that can be used for paying off those emergency debt bills. However, life insurances, pension funds and health insurances should never be used against paying off debts.
- Make a budget: ‘If you fail to plan, you plan to fail’ and that’s exactly why you would need to make a budget to always be in the debt free zone. Make a list of all the expenses, including your home loans, educational loans, car loans, credit card EMIs and others, which you would be required to pay every month until maturity. If you still find some free money left, then you can definitely buy that new iPhone that you were eyeing on for months!
- Use debit cards: The only way to have a control on your budget is to pay for what you have. Instead of swiping off your credit card every time, make a habit of using your debit cards or cash instead. Buying things on credit certainly gives you a mental satisfaction for a month or so, but practically, you actually would need to pay the entire amount the very next month.
- Make smart investments: If you really want a loan, don’t hesitate to negotiate the rates with the money lender. Make smart investment plans that will give you a good return in the future. Take help of a loan advisor to opt for loans with low interest rates and administrative charges.
Debt management is certainly not for the faint of heart. Yet getting your debt under control can make for a productive and stress-free life.
At its core, you must have firm control over your spending habits. Life can sometimes make few exceptional turns for which you may require some emergency money. In such scenarios, you’d thank your lucky stars that you’re not overstretched due to debt repayments.