What are the best strategies to become debt-free?

Summary

Debt (debt-free) is a situation that has become very common in today’s time. People take loans for everything from buying a house to studies, marriage, car, treatment, or business. But if this loan is not repaid on time, it becomes a heavy burden. This causes mental stress, lack of money, and affects plans.

That is why it is very important to plan to become debt-free in time. For this, first of all you should understand your entire financial situation – how many and from which places you have taken loans, how much interest is being charged and how much EMI is going every month. Then balance your income and expenses by making a strong budget.

According to the interest rate, the strategy of repaying the most expensive loan first (Avalanche Method) or the strategy of starting with the smallest loan (Snowball Method) can be adopted. Along with this, increase savings by reducing unnecessary expenses, use credit card carefully and find sources of additional income.

Introduction

In today’s time, debt has become a common part of our lives. Whether it is an education loan for studies, a home loan to buy a house, an auto loan to buy a car, or a loan taken from a credit card for small needs – everyone is connected to debt in some way or the other. Initially, these loans are a support for us, but if not repaid properly, then this debt gradually becomes a heavy burden.

The burden of debt affects both the mental and financial condition of a person in a bad way. A large part of every month’s salary goes into EMI, due to which neither savings can be made nor future planning can be done properly. Many times, people get so entangled in the debt trap that they do not understand how to get out of it. This is the reason why today, living a “debt-free” life without any debt has become a dream. And believe me, this dream is not just a dream, it can be turned into reality with the right strategy.

Being debt-free does not just mean that you have repaid all your loans. It means a life in which you have complete control over your earnings, can fulfill your needs and desires without any borrowing, and can also invest properly for your future. Such a life is full of peace and balance.

But now the question arises – how? After all, what are the strategies through which we can gradually eliminate our debt and move towards a debt-free life?

Today, in this article, we will tell you some easy and effective ways by which you can not only bring your debt under control but can also get rid of debt completely over time.

What is a Loan?

A loan is money that a bank, financial institution, or person lends you for some time. This money has to be returned within a fixed time, along with interest. When we do not have money immediately to fulfill a need, such as buying a house, studying, buying a car, or starting a business, then we take out a loan.

There are many types of loans, like Homloansan, Personloansoan, Educatloans Loans, Vehicle loans, etc. But keep in mind – a loan is a responsibility. It is very important to repay it on time; otherwise, your CIBIL Score, i.e., credit history, may be spoiled in the future.

Simply put, loan is a way through which you can get the money you need today, but it has to be returned in the form of installments in the future.

What will happen if you do not pay the EMI of the Loan?

Let us understand in simple language what can happen if you do not pay the EMI of the Loan.

1. Late payment charge and interest

If you have not paid the EMI on the due date, the bank can charge you a late payment charge. Also, the bank starts charging a high rate of interest on the outstanding EMI, which can usually go up to 36% per annum. This makes your EMI even more expensive.

2. Impact on CIBIL score

Your CIBIL score is very important for your financial future. If you do not pay EMI or pay late repeatedly, it gets recorded in your credit report, and your score may fall. This may make it difficult to get a loan or a new Loan in the future.

3. The outstanding keeps increasing

If you do not pay EMI, your outstanding balance keeps increasing because interest keeps getting added to it every month. The longer you do not pay, the bigger amount you will have to pay.

4. Recovery calls and notices

If you do not pay EMI for several months, then you start getting repeated calls, messages, or emails from the bank. After this, the bank can also send you a legal notice. In some cases, the bank can also send recovery agents to you.

5. Legal action can be taken

If your amount has become very high and you have not paid for a long time, then the bank can also take legal action against you. This can also affect your image and mental state.

What to do if you are unable to pay Loan EMI?

• Talk to the bank and try to restructure the EMI.
• If your financial condition is bad, ask the bank about a moratorium or a settlement plan.
• Keep the auto-debit facility of EMI enabled so that payment can be made on time.
• If needed, seek the help of a financial counselor.

What are the best strategies to become debt-free?

Below are some effective and easy strategies that you can adopt to gradually move towards a debt-free life:

Understand your entire financial situation.

First of all, know how much loan you have taken from whom. Make a list which should include:

• How much is the total loan
• How much interest is being charged on which loan
• How much EMI is being paid every month

Start making a budget

Keep a record of income and expenses every month. Cut down unnecessary expenses and save money separately to repay EMI or loan. Make a strict budget so that unnecessary expenses can be avoided.

Repay high-interest loans first (Avalanche Method)

Start repaying the loans on which the highest interest is being charged first. This will save interest, and the debt will end quickly. This is called the “Debt Avalanche Method”.

Try the Snowball Method (Psychologically Effective)

If you need motivation, pay off smaller loans first. This will boost your confidence, and you will be more motivated to pay off the rest of the loans.

Try to increase EMI

If your income has increased a bit or you have received a bonus, try to increase the EMI. This will finish the loan quickly and also reduce the interest amount.

Use credit cards wisely

Use credit card very wisely. If you do not pay your credit card bill on time, the interest is very high. Try to pay the entire bill on time, do not postpone it by just paying the “minimum due”.

Find ways of side income

Start a part-time job, a freelancing career, or a small business. Whatever extra income you get from this, use it directly to repay the loan.

Prepare yourself mentally

The most important thing to become debt-free is your mental strength. During this time you will have to make sacrifices many times – like postponing going out, reducing eating out, etc. But these small sacrifices will give you great relief.

Do not take a loan against the loan

Many people take out another loan to pay off one loan. This is only postponing the problem, not a solution. This increases the debt further. So take a decision carefully.

Consult a Financial Advisor (if needed)

If your situation has become very serious, then meet a financial advisor. He can help you in making the right plan.

What is a Loan Settlement?

Loan Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your Loan by making a lump sum payment. It is an agreement that you make with your card issuer as a last resort when you see that your Loan debt is increasing.

This can happen due to many reasons, ranging from unnecessary spending to careless spending habits. When your debt increases, the interest on it also increases, which can make it difficult for you to repay the outstanding amount. If you do not see any way out of this, then you can recommend a Loan Settlement.

What are the reasons for doing a Loan Settlement?

Below are some common reasons:

• If a person loses his job, stops a source of income, or suffers huge losses in business, then it may be difficult to repay the loan on time.

• There may be a shortage of money to repay the loan if the expenses suddenly increase due to a major illness or medical emergency.

• Many times, a person has the burden of more than one loan, which becomes difficult to repay on time.

• There may be problems in repaying the loan due to any natural disaster, accident, or any major crisis in the family.

• If the interest rate of the loan is very high and there is a problem in repaying the installment, then a Loan Settlement is resorted to.

• Many times, a person is not able to manage his expenses and income properly after taking a loan, which causes problems in repaying.

What documents are required to do a Loan Settlement?

Let us know what documents are required for Loan Settlement:

1. ID Proof

• Aadhar Card
• PAN Card
• Passport
• Driving License
• Voter ID

2. Address Proof

• Aadhar Card (if it has the correct address)
• Electricity or Water Bill
• Copy of Bank Passbook or Bank Statement
• Rent Agreement (if you live on rent)

3. Income Proof (if required)

• Salary Slip (if you are employed)
• Bank Statement (last 6 months)
• Copy of Income Tax Return (ITR)
• Business Documents (if you are a businessman)

4. Loan Statement

You will have to provide the Loan statement to give the correct information about your outstanding balance. The bank can also generate this statement itself, but sometimes they ask you for a copy of it.

5. Settlement Request Letter

If you are approaching the bank for settlement on your own, you will have to give a written Settlement Request Letter in which you can explain:

• Why do you want a settlement?
• What is your financial situation?
• How much can you pay as a one-time payment?

6. Settlement Offer Letter given by the bank

When the bank agrees to the settlement, they give you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.

What to do before doing a Loan Settlement?

Below are some steps that should be followed before a Loan Settlement (Debt – Free):

• First of all, check your income, expenses, and all other debts properly. Know how much you can repay.

• Before a Loan Settlement, share your problem with the bank or lender. 

• Sometimes, they can offer you a better solution, such as reducing the EMI or increasing the loan term.

• Contact a financial advisor or expert. They can help you make the right decision and explain how a Loan Settlement will affect your credit score.

• If you decide to do a Loan Settlement, read the terms and conditions given by the bank carefully. Make sure that you are not being charged any hidden fees.

• Doing a Loan Settlement (Debt – Free) can reduce your credit score. This can make it difficult to get a loan in the future. Make a decision keeping this in mind.

• Loan Settlement should be the last option. Before that, consider other options like refinancing, reducing EMIs, or asking family and friends for help.

How to apply for Loan Settlement?

If you are unable to pay your Loan dues and are troubled by heavy interest rates, a Loan Settlement can be a possible solution. Under this process, the bank or Loan company can waive off part of your total outstanding amount and give you the option to make a lump sum payment (One-time Settlement). However, this can affect your CIBIL score, so adopt it only as a last option.

Step-by-step process to apply for Loan Settlement

• First of all, decide that you are not in a position to pay the entire Loan dues.

• Check your income and expenses and decide how much you can pay at the most.

• Talk to the customer care of your bank or Loan company and tell them about your current financial situation.

• Ask for a settlement offer from the bank and start the conversation.

• The bank will propose a settlement amount, which will be lower than your outstanding amount.

• If you don’t accept this amount, negotiate with the bank and attempt to lower the amount based on your capacity to pay.

• After the bank and you reach an agreement on a specific amount, ensure that you receive a written settlement letter.

• It should explicitly state the settlement terms, payment dates, and other conditions.

• After completing the settlement, pay the amount in full within the given time.

• Get a No Due Certificate (NOC) or Final Settlement Letter from the bank after the payment.

• After the settlement (Debt – Free), make sure the bank updates the “Settled” status in your CIBIL report.

• This can affect your credit score, so inculcate good financial management habits to improve it in the future.

What is the impact on the CIBIL score after a Loan Settlement?

A settlement can hurt your credit score. The impact can be seen in the following ways:

• After the settlement process, your credit report records that you have “settled” your debt. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a settlement means that you have not repaid the entire debt, when you try to get a new loan in the future, banks may reject your application or offer you loans at higher interest rates by looking at your credit score and report.

• After settlement, if you have a Loan or other credit line, your credit limit may be reduced as creditors think you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, Loan, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle with your bank, you are not paying off the entire debt, but a certain amount that is less than the principal amount. This is viewed negatively by the credit bureaus, as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

What are the advantages (Pros) of doing a Loan Settlement?

Let us know what the benefits of doing a Loan Settlement are:

• If your Loan dues have become very high, and you are unable to repay them, then a settlement can give you great relief.

• When you do not pay your Loan continuously, the bank can send a legal notice to you and can also send a recovery agent.

• The interest on Loans is very high, which can be up to 30-45% per annum. If you are not paying on time, the interest and late payment fees keep increasing continuously.

• While settlement will bring down your CIBIL score, provided you exercise financial responsibility after settlement and settle your other loans and bills punctually, you will improve your score over time.

• In a Loan Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the persons who desire to come out of debt by increasing a little money at a time.

• Mental tension grows through rising debt and bank calls. On settlement, you are free from this concern, and you may concentrate on better financial status again.

What are the disadvantages (Cons) of doing a Loan Settlement (Debt – Free)?

Let us know in detail what the disadvantages of doing a Loan Settlement are.

• The biggest disadvantage of a Loan Settlement is that it spoils your CIBIL score. When you settle with the bank and pay a lesser amount instead of paying the entire dues, the bank reports it in “Settled” status. This status can remain in your credit report for up to 7 years, which may make it difficult to get a loan or a new Loan in the future.

• If you have done a Loan Settlement once, banks and other financial institutions may consider you a “high-risk customer”. This may cause problems in getting a home loan, personal loan, or business loan, or the bank may give you a loan at a higher interest rate.

• In some cases, when you go to take a loan from another bank in the future, the bank may ask you to repay the entire previous settlement amount after looking at your credit history. That is, if you had settled by paying Rs 50,000 on an outstanding amount of Rs 1 lakh, then the new bank can demand the remaining Rs 50,000 from you.

• If you have settled a Loan with a bank, then the same bank can refuse to issue you a Loan again in the future.

• Doing a Loan Settlement can spoil your relationship with the bank. The bank sees it as if you have not fulfilled your financial responsibilities completely, due to which you may face problems in banking services in the future.

Conclusion

Being stuck in debt is a situation that not only puts a burden on our pockets, but also has a deep impact on our mind and life. A large part of our monthly salary goes into EMIs, which neither allows us to meet our needs properly nor make any plans for the future. Apart from that, in case of an emergency, things get tougher.

However, the best thing is that becoming debt-free is not at all a tough job. Yes, it might take time, effort, and discipline, but it is possible. For this, firstly we have to know about our financial position properly and then we have to prepare a concrete plan. The strategies we have mentioned in this article – such as creating a budget, paying off high-interest loans first, beginning with the small loans, managing the expenses, and looking for ways to make extra money – all these collectively will lead you towards the direction where you can slowly get out of the debt trap.

The most important thing in this journey is patience and consistency. Many times you will feel that the debt is not going away, but if you keep on sticking to your goal without stopping and without getting tired, then a day will definitely come when you will be able to say – “Now I am completely debt-free.” And the happiness, self-satisfaction and mental peace of that day is incomparable.

Frequently Asked Questions (FAQ’s)