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Burdened with multiple loans? Here's how to deal with them

Last updated on: September 14, 2012 15:11 IST

Burdened with multiple loans? Here's how to deal with them

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Joseph Samson, RupeeTimes.com

Gone are the days when people used to save money for years to buy things they liked. The young generation today finds more comfort in purchasing assets on credit. This is why more and more young people are seen approaching banks for various kind of loans, just to own things quickly. Owning a house at a young age has become the trend amongst the urban youth. Cars are no longer an asset but have repositioned themselves as a necessity. Plastic money (credit cards) has almost faded out the concept of carrying cash in hand.

Banks also realise this trend and thus often come out with appealing schemes which tempt people to avail loans, considering the fact that getting a loan is no longer an ordeal. But, all kinds of loans are debts which have to be repaid, with interest. This creates a trap for people who later find themselves surrounded by multiple loans.

Nowadays, it is common to find people who have several debts to pay off. And thus arises the big question: Which loan to repay first?

Rupeetimes.com had recently conducted a poll on similar grounds. Consequently, majority of readers were found to have opted to repay the loan with the highest interest first. Poll results showcased a majority of 62.9 per cent people preferring to pay off the loan with the highest rate first.

Only 3.23 per cent people placed their stand as being situation-specific.

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Burdened with multiple loans? Here's how to deal with them

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First, repay loans with high interest rates

As a general rule, repaying the loan with the highest interest rate is a good idea.

When surrounded by several debts, repaying the one with the highest rate will help to avoid stocking up extra interest rates. Over a period of time high interest rates can add up and have a snowball effect.

It means that one should repay the high interest loan first, while making minimum payments on other loans.



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Smaller loans? Pay next

At times, what seems sensible does not appear to be the most profitable option too. This tempts many people to repay the smallest loan first. People do this because by paying off smallest loans first, they get a sense of relief.

This can be attributed to the fact that by repaying small debts first people reduce the total number of unpaid loans, which gives them a feeling of progress towards repayment of their debts. But, the practice of paying small loans first despite having a high interest loan pending should be avoided.



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Don't keep financial matters dependent on the situation

Borrowers should always have a clear cut plan as to how they will repay the loans and manage their finances.

Uncertainty in financial matters can lead to ugly situations like hypothecation of assets or having to deal with loan recovery agents. To avoid this, never leave matters relating to loan repayment contingent, instead preplan your action.



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Refrain from taking multiple loans

Loans are debts and no matter how tempting an offer looks, one should avoid taking many loans at a time. If there is an urgent need, then cut down on luxuries and other expenses and focus on repaying an existing loans first.

This way a person can maintain his/her dignity and also fulfill his/her desires.



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