Did you plan to make 2006 debt-free? Good for you.
What better time to get cracking than in the first month of the year?
Here are some tips to help get you started.
1. Opt for a balance transfer on your credit card
Say you owe Bank A Rs 25,000 on your credit card. And, the interest being charged is 2.95% per month.
Bank B offers you a balance transfer where you pay 1.65% for six months and then the rate of 2.95% will be levied.
You decide to opt for Bank B's credit card and transfer your outstanding (Rs 25,000) from Bank A to B.
Bank B gives you a demand draft (in favour of Bank A) of Rs 25,000 so that all your dues with Bank A are settled.
Now, make sure that you scrounge and save and pay back the entire amount within six months. Or else, this exercise would prove futile if you get yourself in debt again.
Sometimes the banks have a minimum amount which you can transfer. For instance, Bank B may allow you to transfer your outstanding to them for a cheaper rate of interest but may not welcome outstandings less than, say, Rs 10,000.
Also, ask what the processing fees are. You may be charged a percent on the amount transferred or a fixed amount.
Opting for a balance transfer makes sense only if you are capable of paying back the entire amount (or at least a major chunk of it) during the introductory period when the interest rate is lower. And, if the amount you are transferring is fairly large.
And, while repaying it, try not using your card at all. Because all payments made on the card during this time will be subject to interest rates.
2. Ask for help
Most people are universal in their advice that you should never borrow from family or friends. It's a great way to destroy a relationship. Nevertheless, it is still an option (though not the best).
If you are really worried about situation you are in, maybe you can request your parents or siblings to help you out. If they are not in a position to, how about a rich relative or a friend?
It will help if you give them a time frame and promise to repay the entire amount within that period. Also, putting it down in writing will make them realise how serious you are about repayment.
3. Maybe it's time to get rid of it
Selling what you bought doesn't sound good, but it's an option you must explore if you are steeped in debt.
If you took a loan to buy a car, then maybe you could look at selling the car and with the money you get, close the loan.
If you are in your twenties and have found yourself in a tight spot because you cannot repay your home loan, maybe you can consider selling the house. After you have a grip on your finances and an increased income over the next few years, you can look at buying a house once again.
Or, if you urgently do need to own a home, sell your current home and move into the suburbs or opt for a smaller home. You will make a profit on the sale which will help you get by and will now be in a position to service a smaller loan amount.
4. Get innovative
If selling the home is out of the question, then look at renting it out.
A friend of mine went through a tight spot when servicing a home loan. For two years, he gave his house out on lease and moved in with his sister and her husband.
The money he made on the lease helped him service the home loan till he got back on track.
When I went through a tight phase for a few months because of some personal problems, I realised that I found it extremely difficult to repay my car loan. For two months, I kept my car at home and refused to use it (except for a quick drive once a week). I used public transport or asked colleagues and family for rides.
The result: I saved heavily on petrol.
I also stopped eating out or shopping.
I was amazed at the savings this amounted to. So without borrowing, I managed to pay my Equated Monthly Installment (money paid every month towards the loan) on the car loan during that period.
5. Don't be too eager to invest
What is the point of putting your money every month in a recurring deposit that will earn you 8% per annum when you are paying interest on your loan at 14% per annum?
Instead, channelise all money towards repaying your loans. This is specially true if it is a credit card loan, personal loan or money borrowed from unorganised sources. The interest rate is highest in such cases.
Inheritance, monetary gifts, bonus, tax refund, maturing fixed deposits and salary increments should all go towards making you debt-free.
The key to dealing smartly with debt is to make it a priority. Once you do so, you will find ways and means to repay it.
If it entails living a frugal lifestyle for a while, do it. In the long run, no one is going to bail you out when you are drowning in debt.