The covid-19 pandemic has caused financial stress for many households. Employers have reduced salaries, and businesses have taken a hit due to lockdowns. Due to this, for many, servicing loans could be difficult.
If you find yourself in trouble, you need to have a plan to manage your debt, instead of getting overwhelmed by the situation.
One common strategy is to take stock of all your loans. Rank them by interest rate—a credit card, for instance, would be the highest, then a personal loan followed by a car loan.
You should focus on the debt with higher interest first. The reason behind paying off the debt with the highest interest rate is simple. It reduces the interest outgo. Once a person clears the debt with the highest interest rate, he will have more money in hand.
But some researchers have found the reverse strategy could also work well for people. Instead of paying the debt with the highest interest rate, you first repay the loan that is the easiest for you.
Say a person has a consumer durable loan of Rs35,000 and a credit card debt of Rs1 lakh. Instead of focusing on the credit card loan, the borrower can repay the consumer durable loan as it is of a smaller amount.
It can work for some people as it gives a sense of progress. When one loan is repaid, the borrower is motivated to tackle other loans.
If you can take one loan at lower rates to finish off the entire debt, evaluate it. Say you have a car loan, a personal loan, a credit card outstanding and a home loan. You can approach the lender with whom you have the home loan as ask for a top-up. You can also consider taking a loan against a fixed deposit or other securities. Such loans have lower interest rates than personal loan and credit cards.
What would work for you is up to you to decide. But if your debt is piling up, ensure that you have a plan to finish it.