A World Economic Forum Report recently highlighted that debt has risen in India (read more about it here). As per Reserve Bank of India (RBI) data, Indian household debt rose to 37.1 per cent of gross domestic product (GDP) in the second quarter of 2020. Overall debt held by households was roughly valued at Rs 43.5 trillion, as of March 2021. Government and corporate debt levels have also worsened. As India’s national debt hit almost 89.6 per cent of GDP in 2020-21, government debt touched 70 per cent of GDP. Corporate debt levels went up to 47 per cent.
If you are stuck in a debt trap, the first step to resolve the issue would be to acknowledge the problem. Start with assessing your finances and making a list of the outstanding loans you have. This would help you to strategize better and pay back your debt faster.
Here are four ways to get out of a debt trap:
Take a secured loan to pay off existing debt: Secured loans are a cheaper form of credit. In this case, the lender holds some form of security as collateral, and therefore the interest rates on the loans are lower as the risk is lower. Consolidate your existing high-interest debts and repay them using a secured loan that has lower interest rates.
Taking a loan against fixed deposits (FDs) is among the cheapest ways to borrow. Loans against FDs are usually priced 50 to 250 basis points above the relative FD rate. Given that the FD rates are currently averaging 5.5 per cent, you can get a loan against an FD for as little as 6-6.5 per cent, which is cheaper than a home loan. “Most lenders do not levy any prepayment charges or processing fees. The only caveat here is that you need to have an FD whose deposit value is at least 10 per cent more than the loan you are borrowing. So, if you need to borrow Rs 2 lakh against your FD, you need to have an FD of around Rs 2.2 lakh,” says Adhil Shetty, CEO, BankBazaar.com.
Consider debt consolidation: Debt consolidation allows you to combine multiple small debts into one loan. This may also come with more favorable repayment terms such as lower interest rates and affordable EMIs. It also allows you to keep a tab on your overall debt efficiently and simplifies your repayment process as there are fewer payments to track and repay.
However, debt consolidation loans have their own caveats. “Since debt consolidation is primarily used to consolidate expensive unsecured debt, the new loan may be of higher value and the lender may require collateral as security to approve the loan. Debt consolidation loans can also be restrictive. They usually come with a debt agreement which stipulates that the loan amount can be used only to repay existing loans and that the loans would be closed within a fixed period, without delays,” says Shetty.
Debt consolidation may also restrict you from borrowing further during the consolidation period. Although, in a way, this is good as it prevents the borrower from taking on further debt. “On the flip side, you may no longer be able to borrow even in case of emergencies so long as the debt consolidation loan is running,” adds Shetty.
Get rid of expensive loans first: When you are stuck in a debt trap, it would be wise to first identify your expensive loans and pay those off. You should ideally start with the one that has the highest interest rate. Then, there are unsecured loans such as credit card debt that add to your liability, if not paid on time.
Take professional help: If you are not able to resolve your debt issues, do not shy away from seeking professional help. If you are indeed in a crisis, you could always approach a financial planner or a debt counseling agency to help you or to negotiate with creditors on your behalf. Such negotiations usually pertain to lower interest rates, waiving off late payment penalties and even loan restructuring.
A debt counseling agency usually charges fees depending on your lending institution and loan amount. There are also many NGOs that offer debt counseling free of cost.
In the end, there’s nothing embarrassing about carrying a debt burden. A bit of smartness and honesty can save you from the clutches of creditors, and help you live a stress-free life.