Sunday, August 10, 2008

Getting out of debt

Being in debt is bad enough. Not managing it well is worse.
The first principle towards settling your debt and moving towards a debt-free existence (however distant it may sound) is in prioritising your debt.
What you must hold on to and what you must clear as soon as possible is the first step towards debt management.
In this article, we will tell you how you can reach that blissful state. Start by asking (and answering) these four questions.

1. Are you getting any tax benefits on the loan?
A home loan and an education loan come with tax benefits.

2. Is the rate of interest very high?
Logically, the one with the highest rate of interest is the one that should be cleared quickly.
Two types of loans that should be cleared as soon as possible are personal loans and credit card loans.
The interest rate on these loans is the highest. On credit cards, it amounts to around 24% per annum (at 2% per month). A personal loan should be around 18% onwards.
Even if you get the personal loan at a discount, it would be around 14% per annum.
Interest-free or low interest rate loans from friends and family are the ones you can hold on to, if it will not cause a rift in your relationship.

3. Which are the loans that you can close?
This one will be tough because you have taken a loan to own something.
Sure, you may lose face. But no one is going to come and bail you out. It is better for you to make some smart moves on your own.
Let's say you took a loan to buy a swank car and now realise that you have bitten more than you can chew. In that case, sell the car and close the loan.
You can always buy a car later once you have settled all your debt.

4. Can you switch the loan?
If the rate of interest on your loan is high, you can switch it to a financier who will charge you a lower rate of interest.
Credit cards do this and call it a balance transfer. Say you are paying 2% or 2.25% per month on your card. You can go in for another credit card. They will pay back the bank and transfer your loan onto the new card. For the first six months, they will give you a lower interest rate. Say 1.5% or 1.75% per month.

The sbove steps will help you get out of debt.