Home loan EMI – check, Car loan EMI – check, Personal Loan EMI – check…the list is endless! The reality of today’s households is centered around everyone trying to keep their heads over the host of EMIs that they need to pay out every month!
Needless to say, for many…the amount spent on monthly EMIs has gradually become greater than their monthly income! The result? Resorting to the plastic in the wallet for making purchases, and worse, for withdrawing cash.
In short, unchecked debt increase and thereafter fatter and fatter credit card bills do nothing other than dig deeper pits for you and your family.
And dangerously this is too common a story today! What one needs is a well thought out route towards being debt free. Don’t let EMIs become your biggest financial trap!
Why is staying debt free important?
Staying debt free and having a clean borrowing history is crucial in current times since various credit information organizations such as CIBIL and the like track and pass on the credit history of individuals to banks and other financial institutions. In the calculation of your credit score, almost 35% weightage exists on your repayment history. Hence, if you have a poor credit history, you will find it very difficult to get loans from banks in the future. Your credit card limit will also get affected and in some cases credit cards even get blocked for people with a poor credit score.
The route to being Debt Free:
Step 1 – Know your status:
Your first step is to know whether you have already fallen into the EMI trap or not and if you have then how deep in it you are. Experts say that if an individual is paying EMIs to the tune of 45% of his/her income, then it is already a matter of concern.
Step 2 – Assess your debts:
Take a good look at the kind of debts you are paying EMI for. Are these good debts? That is, are these EMIs for assets or investment towards yourself that will give returns in the future? Max to max 25% of your income should go into EMIs that are non-mortgage loans or fall under discretionary spending. However, this does not mean that EMIs for good debts in huge proportions every month is financially healthy! There are umpteen no of examples where car loans or personal loans get rejected for people with good debts such as home loans, but with monthly EMI amounts that are more than two/third of their net income.
Step 3 – Possible debt repayments:
Make a list of all your debts and analyze which ones are the costliest and which ones the cheapest. Credit card roll overs, for example are the most expensive with almost 40% interest rates so they should top your repayment list.
Second priority is your personal loans. Take into consideration the tenure of these since there’s an element of penalty involved. If you see that the loan would get over in a couple of months then there is no point. Repay loans which still have 6-12 EMIs to go at least. One should also look at the tax aspects of the loan since some provide exemption benefits and might be better to keep in comparison to the others. For example, educational loans.
Step 4 – Unique ways to be Debt Free
You can think of consolidating your debt in order to go debt free. Taking a loan to repay other loans might sound like a bizarre idea but it can actually work since the new interest rate would at least be lower than the interest rates of personal loans and credit card roll overs. Loan against property also works towards liquidity. However, if you lack discipline than such measures might not work since taking another loan might just be adding to your problems. In case you take a loan against property and then go for a holiday with that money, you would basically be digging a deeper financial burden pit for yourself.
As a conclusion, it can be said that, being debt free and not having to think about the constantly growing EMI amounts leads to a lot of positives…both on your credit score front as well as your personal financial planning front. So now that you know how to go about being debt free, what are you waiting for? Get out of those big financial traps called EMI’s!