What is Debt Management and its Importance?

Debt Management explained

You can get loans easily. Today there are surfeits of avenues, willing to provide you debt. But that's one part of the story. Can you manage the debt repayment once payback time steps in?

The whole process of taking debt and repaying it is termed debt management.

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Importance of debt management

Debt management originates when you are even thinking of taking a loan. The single most important factor with considering then is the amount of disposable income you will have in hand after meeting your expenses fairly.

Points to consider before you take debt

• Can your disposable income support the future EMI payments?
• In case of emergency, do you have assets to can cover your debt on liquidation?
• Is the loan you are taking absolutely necessary? Remember, missing even one EMI will pull down your credit score considerably.

As long as you are repaying back your EMIs and credit card dues on time, everything remains fine. But life is not a fairy-tale and EMI or credit loan repayment default occurs fairly often. It's then that the hell breaks loose.

Credit card and personal loans are unsecured. They are easy to get, but carry an astronomical penalty in case of default. In case of multiple miss of repayment on scheduled dates, you will soon be overwhelmed with an ever mounting penalty interest to pay for. In extreme cases sometimes it surpasses the loan principal.

The second part of debt management starts here.

Actual debt management starts now

This is the crucial part when you are unable to repay installments on time and the unsecured debts are compounding with interest.

How will you get rid of debts?

• Keep the penalty of the debts from rising further by paying the monthly minimum amount for all the debts. As this amount is generally very small compared to full installment amount, normally it is payable even in times of distress
• Now take the first unsecured loans that you want to pay in full. Preferably, choose the credit card loan first, as non-payment of interest for this loan shoots up interest penalty from 24% to 50%.
• Change your lifestyle to generate more disposable income. This is mandatory.
• Try to generate extra income whenever possible.
• Use both these amounts to repay extra amount of credit card loans.
• In case you do not have credit card loans outstanding, attack personal loans. These have the highest interest rate after credit cards. This is because both loans are unsecured.
• Do not stop till you repay either of these in full. Once a high interest loan is closed, it will give you a psychological boost to take over the next loan with max. Interest rates.
• Throughout all this process, debar other loan penalties from increasing. Religiously pay the minimum payable amount each month for all other loans.
• In this way, choose to kill each loan, one by one, starting from the highest unsecured loan first.
• Another part of debt management is proper utilization of “windfall amount”. These amounts are a lump-sum one time payment which you had not anticipated. It can be arrears, income tax refund, a sudden increase in value of shares. Main point is, instead of utilizing this one time amount into something that would fade with time, desist and rather downsize your loan with this amount.
• If you are unable to arrange for disposable income enough to close even one loan, go for low cost long term loans. If salaried individual, you can consider EPF, PPF or PF loans.PF loans have an interest rate +2% above the ongoing rate they pay to you. What's more, if the situation is dire, you can apply for “Non Recoverable Loans - NRL”.
• You can also try to arrange for long term loans from p2p lending agencies. Try to secure a long term loan at a considerably lower interest rates.

• Another avenue of debt management can be under or unutilized assets lying idle like gold. If you think that your prospects will improve in future, you can take  gold loan, which being secured, carries lower interest rate than unsecured debts.
• You can also liquidate a part of your gold of any other fixed assets to foreclose a high interest loan. That is why, the beginning of this article stressed on the fact of checking whether you have enough assets to cover your loan.
• Automated debt management makes liberal use of applications like Bankbazaar or Bluecoins finance manager in Android. Such application not only helps you decide the trend of income and expenses of each category, but auto-alerts you on the date of different repayments. You can now visually pinpoint areas of weakness and strengths in your income and expenses.

The base of debt management lies in self-discipline and accepting the fact that you have to alter your lifestyle, search for extra income and desist from taking new loans. You have to go through some hardships but closing and paying up existing dues has to be prioritized.