What is a loan-trap?
It is a situation where interest payments and principal repayments take up increasing amount of our present and future income consequently impairing our ability to meet other important expenses and ultimately paving the way to bankruptcy.

Ways to simplify your debt

• Consolidate your debt
If you are burdened by high cost loans like outstanding on multiple cards, transfer in to one card. Then you can take one huge loan (Debt Consolidation Loan), which will be easier to manage and much more cheap than personal or credit card loan.

• Prioritize your debt
If you are floating in a pool of huge loans, then to come out of that, you have to rank them in terms of interest rates. This gives you a clear picture of about every loan and the cost behind each of them. And therefore you can disperse costly loans first and later the others.

• Say ‘NO’ to a new loan
Promise yourself not to take on any new Loan. Stop all purchases on credit ideally, you should stop using all your credit cards for the time being and switch over to debit cards. This way you will continue to enjoy the convenience and safety of carrying a card rather than cash and also prevent yourself from building any fresh liabilities. And before committing to a new ‘good’ debt do a thorough analysis of your financial condition.

• Balance your budget
You have to match the incomes and the expenses. Generally incomes are not easy to change especially in the short run. Therefore, the axe falls on the expenses. Therefore PROIRITISE & AVOID EXPENSES that could be done away with. You can simply cut your non-essential items for the time being to save and pay off your loans.

• Liquidate few investments
It’s not worth investing your money or holding on to your low-yielding investments when you have to repay such high loans. You should compare with the interest rate you are earning on a given investment and interest rate you are charged on your debts, i.e. you should liquidate some of your low return yielding investments too pay off your dues in which you are paying huge amount of rate of interest. But then, do ensure that your equity investments aren’t tampered with.

• Negotiate with your lenders.
Have an honest dialogue with your lenders especially if you are in neck deep debt. Banks are ready to bend themselves to help recover loan from you. For instance, you want to prepay a loan, but the agreement does not have such provision. You can negotiate with your lender and work out a deal or you can switch over to fixed from floating rate of interest by paying some one time fine. Banks/lenders would appreciate this and restructure your debt.

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Debt Consolidation as a product and service is not developed in India as yet, but it is very simple for you as a customer if you think SMART!.

Debt Consolidation means taking a single huge amount loan of long tenure and also at lower rate of interest to pay off your debts of varying rate of interest. What you need to do is, calculate your total debt with the principle amount and the rate of interest on all of them. And search from various loan products available the loan that suits your need the best, like the following:

• Take a personal loan: If your debt is credit card based then you will benefit from this being a much lower interest rate by between 10% and 18% lower. • Refinance your car If the interest rate at which you have financed your car is higher than the current prevailing market rate, then you should definitely refinance your car with lower rate of interest.          • Home loan Home loan is a secured loan; therefore it provides you the lowest rate of interest with longer-term loan tenure and meaning your monthly payments are lot less.

• Benefits of Debt Consolidation

• Single payment to be made: Yes it is right! It’s easy to pay an installment every month, for a single debt (debt consolidation loan), rather than servicing many loans like your car loan, home loan, credit card dues etc. This will ease your finances. • Interest rates: To go on further, you should know the interest rates charged for all of your debts. o The highest interest rate charged amongst all your dues is on your Credit Card, i.e. 32-36% per annum. o People get attracted to Personal Loans as they are easily available and the interest rate on such loans of 18% plus. o And then comes your Car Loan, which charges you between 13-14% per annum. o Lastly is Home Loan that has longer tenure and lower interest rate, around 11-12% per annum. Therefore, you should be looking for a lower interest rate loan if you are opting for a debt consolidation loan. This is because you intend to clear higher interest rate debts by a loan that you should avail at lower interest rate. • Monthly payments: When the interest rates go low, so do your monthly obligations. And moreover via these loans you can have your monthly payments as per your repaying capability. • Single creditor: You now have only a single creditor to deal with. When you have a problem, you can pick up the phone and talk to that single person rather than having to contact various lenders. It frees up your time and also your tensions. • Tax deductions: The interest you pay on your debt consolidation loan can be taken as a deduction on your tax forms submitted to the taxman. • Loan tenure: The loan tenure i.e. the repayment period for debt consolidation loans is longer as well.

Debt consolidation loan, if not used appropriately can lead you to misery. You need to pay off your installments on time and do not switch to spending a lot or take a new loan. If you do this, then this can rack up even further debt, you will enter a downward spiral and you will not be able to get out of it. It is best advised to use a debt consolidation loan timely, smartly and wisely.

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