Many millennials are suffering from debt issues. This is true of the new generation too, especially, with the ease of credit card rules and availability of features like Buy Now Pay Later (BNPL). Their craze to purchase using credit is real as their burgeoning debt problem. There is a drastic shift in consumer persona as banks and fintech organizations have made it increasingly easy for the young generation to buy using credit cards, BNPL mechanisms, personal loans, and more.
Increasing debt problems have forced many families into financial distress. This behavioral tendency was more evident during the Covid-19 pandemic when many families were forced to take out personal loans to pay off their medical expenses. Repaying hefty loans can be difficult, especially, with increasing loan interest rates. The burden of debt is exacerbated by certain myths that must be shed with necessary information about loans and liabilities.
Some myths that have hampered debt repayment and have only prompted borrowers further into an unwanted debt trap include:
You cannot repay debt unless you have more money in hand
There could not be a bigger lie than this. Of course, you must earn enough to save enough and then repay your debt but this does not mean that low-income people are never free of their debt problems. What matters is how willing you are to repay the loan(s) that you have sought. You must then start by working on a budget, cutting down on your unnecessary expenses, and being willing to live a frugal lifestyle. Making minor changes, such as eating out less frequently, can help you claw your way out of debt.
Prioritize repaying your bigger debts
If you have multiple debts, be it credit card debt or personal loan, check which of them is the smallest loan trap. It is like accomplishing your short-term goals wherein you must first pay attention to your financial goals in the short run. For the unversed, this way of reducing your debt is called the “Debt Snowball” method. Paying off your smallest debt first will lend you a “win-win” feeling, which will inspire you to be financially disciplined in order to pay off your other obligations. As you pay off one loan after another, you gain momentum and make progress toward paying off your debts and enjoying a debt-free life.
Debt consolidation is a myth
Whoever told you that you can consolidate your various debt sources to turn them into one huge debt and then repay it could not have been more wrong. Experts believe it can consolidate several loans into a single, reasonable loan with a set repayment period and often at a lower interest rate, simplifying the repayment procedure and potentially lowering the overall amount of interest paid over time. Undoubtedly, debt consolidation assists borrowers in streamlining their finances, accelerating debt repayment, lowering monthly payments, and improving their credit scores.
However, is debt consolidation possible for all? The answer is a big “No”, especially, for those who do not enjoy a high credit score. Those with a history of payment defaults might find it strenuous to find a lender willing to lend such a big, snowballed amount at lower interest rates, thus, aiding the borrower(s) in debt repayment.
Make minimum payments on your debt
It's a big mistake to make minimum payments on your credit card balance, as the interest rates charged by financial institutions on late payments can exceed 40 per cent of the annual percentage rate (APR). It is all the more important to understand how these interest rates are calculated. There is an interest-free repayment cycle for all purchases during the billing period. However, if you carry over any outstanding balances to the next billing period, any new purchases you make will not be eligible for the interest-free period. This means that you must pay interest on new purchases from the first day of your billing cycle.
Instead of choosing to pay only the bare minimum balance, ensure that you prioritize your expenses and try to pay off as much of the balance as possible every month if you can’t pay off the balance in full. Even if you pay a little more than the minimum, it can help you to reduce your debt over time.
Getting out of a debt trap may seem daunting at first, but not at all impossible if you try hard enough to rejig your finances and focus on repaying all your loans first. The idea must be to resolve your debt and aim for a debt-free life. Choose how you spend or allocate your money between “needs” and “wants”. Last but not least, if you are not adept at handling your finances, you may as well seek professional help who will tell you how to look after your money in a way that there is less debt and more scope to build wealth over time.