Are you In Debt Trap: How to come out of it !

While discussing the investments and financial planning with a young couple I found that despite having good salary he was not comfortable to put aside a decent amount for his retirement planning. When we discussed more I found that he has got lot of EMIs running for CAR, TV, and IPhone etc. which were eating a substaintial part of his monthly cash flow.

It is not uncommon to find these kind of young couples, borrowing anything and everything to meet their needs or actually the wants. Now EMI on credit cards makes it further easy to buy the things and paying in future. Many people live in pay cheque to pay cheque and in complete denial of the burden they carry on. Over dues on Credit card are killer, there not only the due amount increase at usurious rates of interest, but the repayment gets tougher as the loan gets bigger. In that situation the person goes to more discreet lenders like family and friends, informal lenders, etc, only to find that they have run out of friends. Informal lenders not only seek higher interest rates but sometimes use questionable means for recovery. So, what can a habitual borrower do to come out of this DEBT TRAP and move forward to the path of saving for long-term goals?

1. Don’t Borrow to Repay the Old Loan

The starting of a debt trap is when new loans are taken to repay older loans. Therefore no further loans should be taken to repay what has already been borrowed. The repayment of a loan should be made out of income not from new borrowing. The person should find new ways to increase his income, for example he can do some part time weekend job to generate extra income or if spouse is not working she can take some job to improve household income etc.  

2. Control the Expenses

Once we realise that we are paying more in EMIs then the normal monthly expenses we should reduce our expenses to fit in the remaining cash flows. To start with we should curb the discretionary expenses, weekend outings and other items which are not necessary till we come out of this trap. We should stop using credit card if dues are not paid as it will carry very high interest charges on the fresh purchases. We need a firm determination and proper budget to come out of this trap as there are several instances of psychological damage like depression and suicidal tendencies which come up due to it.

3. Negotiate and Restructure

We can negotiate and restructure the existing loans which can reduce our burden and fit in to the cash flows. Banks/Credit Card Companies do offer debt restructuring and advice for appropriate payment plan to help chronic borrowers. There are also external professional agencies who can also provide assistance for the debt restructuring. If you are not able to find out the right way it is always better to seek professional help to see what is due, and how it can be reworked. There are some easy way to convert costly loans like Credit card dues into personal loans; penalties can be negotiated for waiver; repayment schedules can be structured in line with capability of the borrower.

3. Sell the Assets to get out of the Mess

Some time we get so much emotionally attached to the things we poses that we don’t want to sell them even though by that we can reduce a significant burden and get a great relief. We should understand the reality and make our existing assets work, like an empty property can be put on rent, we can take mortgage gold/jewellery to raise money or can use our bank/PF balance to reduce the debt burden.  We feel a social stigma about selling assets or mortgaging our ancestral assets but taking some tough decision can be of great help as there may be short term costs but have long-term benefits.

There is a famous Bollywood movie “EMI: LIYA HAI TO CHUKANA PADEGA”, this is the fact and we just cannot escape from it.  We should also understand the fact that loan can be reduced only by repayment not by taking other loan. We will be getting our self in deeper mess if we are borrowing more to pay the older loans. The solutions lies on to figure out how to restructure and reduce the debt by existing cash flows in a disciplined manner. It is always better to take professional guidance before it is too late.