If you are stuck in the web of loans, then through this video, I’ll share seven such ways with which hopefully you could get out of these loans. Friends getting stuck in loans is a very dangerous thing. It has happened to me in my childhood where, not me but my father got stuck in loan. And it took many years to get out of it. I understand the time where credit card collectors stand at your door, you get calls every day asking when will we return the money. This date has come. You need to return this amount. So, it’s a very hard period to deal with. And nowadays it is happening a lot.

Because you get credit cards easily. We have got a ‘Buy now pay later’ radium,-- people are not using these in a disciplained manner. If you find yourself or your family stuck in the web of a loan, then this video might help you. Seven such ways through which you may pay your loans slowly with minimal damage. And two bonus items right at the end of the video. Through which you, no matter what, can secure your family and yourself. The first one, if you find yourself in the trap of bad loans, there are a lot of loans there’s a personal loan, there’s a home loan, there’s a car loan, a credit loan, then it is very important that you prioritize your loans. You have to prioritize the loans knowing this is important that which loan is causing you the most damage. Mostly, these turn out to be short-term loans. These turn out to be the ones that don’t have any collateral. These turn out to be the ones that you buy not with an assest but without assets.

What do I mean by that? If you are taking a home loan, then mostly to take a home loan you need to put your home on mortgage, you need to submit the paperwork for home. The loan will be for a long duration, for 10, 15, 20, 25 years, and because of this its interest rate would be very less. Six percent, seven percent, eight percent, but if you take a personal loan, to take the personal loan you didn’t put any mortgage. There’s no collateral. Maybe you have taken that loan for one, two, or three years. You might have taken the loan for something that you wanted to buy, but you weren’t able to buy, so you thought let’s take a personal loan.

Or, worse your credit card, you’ve swiped with the credit card, but you weren’t at a stage return the money in full. So, you started paying in rotation the minimum amount due. And the next thing you know, the amount for your credit card has become so big, because the interest rate for it is thirty-five to forty percent a year. So, it is important that all your loans, first of all put them in a ranking, and try to understand which loan is causing you the most damage. These are the loans with the highest interest amounts, and the shortest duration. Because their quantum is very big, that means, EMI is very big. And if you don’t repay that loan on time, then your interest will keep increasing. That is the first step, and I remember when I was in a time, where there were credit cards, personal loans, home loans, car loans. This was the first step that we took, father, we first have to figure out that which loan we can repay gradually, but, which loan do we need to repay today? And that is the first step.

Number two, any long-term loans, a home loan, or any such loan, which is for five or ten years, or if you’ve taken a loan from a person whom you know, will trust you, he is after his money, but, not at the expense of your peace. So, sit with them and increase the tenure of your loan. And this is a counter-intuitive suggestion because whenever you increase the tenure of your loan, or increase the period to repay the loan, then you’ll end up paying more interest.

And that may seem counter-intuitive, because, now, you are trying to get out of your loan, but what will happen is during that, when you’ll increase the tenure of your loan, your EMI will decrease. And because EMI will become lesser, then hopefully you’ll have some more money that you’ll be able to divert towards the loans which are sucking your blood, that you need to end anyway. So, I remember my dad took a very big business loan. But, thankfully the person who gave him the loan, was his business partner.

He wanted to get his money back, but also he didn’t want that Ashok Warikoo should have to repay the loan at the expense of himself or his family. So, dad spoke to him very patiently and said, I am not at the stage to repay this loan now, so, can we increase the period of loan, so that monthly I’ll pay you a little less than I used to, but I’ll repay it. And they were okay with that. Because for him, the important thing was at the end of it, he’ll earn more money. Because he’ll get more interest. And you should also be in principle okay with doing that. Because of your short-term impact, will be very less as the outflow of money will become less. Number three, when you are able to do it, the extra money that you’ll get, try to raise your EMI with that, or try to make one-time contributions.

You must understand the math of EMI and loans. I’ve made a whole excel sheet for you. And in that excel sheet, I’ll try to show you how can you increase your EMI or by making one-time contributions you can decrease the tenure of your loan and the loan amount significantly. So, this is the excel sheet. You may also download this excel sheet. But, I assumed that you’ve taken a loan of 50 lakh rupees at eight percent for 25 years. The EMI for it is around ₹ 40,000. At the end of these 25 years, you’ll repay 50 lakh rupees anyway, but the interest amount would be 65 lakh rupees. That means in these 25 years, you’ll return your 50 lakh rupees, but to the bank or whoever you’ve taken the money from, on top of this 50 lakh rupees, they’ll get 65 lakh rupees more. And that is a lot of money. But, if you are only doing two things, every year pay just one extra EMI, just one extra EMI, that’s it.

And increase your EMI by 10%, that means the EMI which was ₹38,591 in the first month, make it ₹42,450 the next year, the next year make it ₹46,695. And you’ll pay the original EMI ₹38,591 you’ll pay for it every year. When you do that then your interest which was ₹65 lakh now becomes only 27 lakh rupees. And that’s not all. The loan is for 25 years, not in 25 years you’ll clear it within Only 120 months, within 10 years! That is the power of paying more than the EMI. So, one extra EMI every year, and increasing the EMI by 10% every year, you’ll make the interest of 65 lakh rupees to 27 lakh rupees which means you’ll earn almost 40 lakh rupees. And the loan of 25 years ends within 10 years. You can play around with this sheet. And this will show you the power of paying in excess whether EMI or one-time contribution.

Number four, whatever your loan is, especially, if it’s an expensive loan, then re-finance it. I’ll give a simple example, you got the bill for your credit card, you are paying 40 to 50 percent, yearly. And it is criminal and it is suicidal, if you are still doing that thing. What you can do is let’s assume, your credit card bill is one lakh rupees. And it’s in rotating, you take a personal loan. That personal loan won’t be with a collateral, But, it would be at a maximum of 13% to 15% or 16%. Which is significantly lower than the 35% to 40% that you pay for the credit card. You take the personal loan, and pay the credit card payment in full. Now, you have to only pay the personal loan at a much smaller interest rate.

The same thing, if you have a personal loan, that you’ve taken from a landlord, or a friend, or a contractor at 20%, then try to take the same thing from a bank or someone else at less interest rate. You take the money and return it to the original lenders in one go. And then keep paying the new lenders the amount. A lot of time it happens with the payments of credit card, you’ll get a call that you can transfer the outstanding bills on your credit card to the other one. Very risky by the way, I do not propose it, but, if you don’t have any other choice, then this may still be a better choice to make. Because when you first time transfer it, then they give you a rebate you get an open offer, where the interest in that time period is very less, and you can actually make the most out of it. Net net, whatever is the interest amount of your loan, wherever you find a lesser than that, please take the money from there. and clear the original loan then try to clear this new loan, because that will be lower financial distress on you.

Number five, followed by this, as I have told you in order to pay a loan if you have to pay another loan, then there’s no fault in that. I have done that so many times in my life. I remember, when there was a time nearbuy was going through a difficult time, I didn’t take my salary for months, there were household expenses, kids’ school fee, EMI for home and all. My credit card was maxed out. Everything was just there. And what I then did was I took a loan from a friend. That person has gave an opportunity to pay my credit card bill completely. He only charged me 10% and that was the cheapest loan that I could’ve taken because thankfully, I had a friend who had the money. So, technically, what I did was took a loan from one person, and repaid the other loan from that. Now, I have this loan completely paid off. I need to pay this new loan. But, it was through a friend. He knows that I will repay his loan even if I delay.

But I won’t run away with his money. And most importantly, it was just 10% so it was far lesser in cost, than what was the original loan. Number six, prepare a budget. If I tell you that, you need to quit cigarette or alcohol, and that is something that you really enjoy or you are addicted to it, then it won’t happen just by wanting, you need to work towards it, right? You will actually have to devote your mental, physical, emotional energy to make that happen. In the same way if you are trapped in a loan, and you need to get out of it, then you will have to work hard towards it. And making a budget is the first step toward that. Try to understand that a lot of people get trapped in loans because they didn’t plan the budget properly. They haven’t thought through everything that is going to happen and because of this, they are sitting now in this financial distress situation.

A great way to prepare a budget Is that the EMI for your loans should never be more than 30% or a maximum of 40% of your total income. And the minute it goes beyond that you know that you are doing something wrong. If your yearly income or monthly income is 100, but more than 30 or 40 is going for EMI, then you are doing something wrong.

And you have to take a pause on that. The best way to budget… is what’s called the 50-30-20 rule. Out of your monthly income maximum 50% should go into your needs. These are your needs, which include your EMI, your rent, your food expenses. The needs of life, that you have to spend to live your life. Thirty percent towards your desires. And that is where you have to control yourself. You want to buy a phone, go on a vacation, you want to buy a car, buy good clothes, whatever it is, you need to adjust yourself within this 30%. And then remaining 20% towards investments.

Long-term investments, that is for your long-term purchases, buy a house, buy a car, education for kids, you want to go out, plans for retirement, whatever the case may be. But you are investing that 20%, so that you don’t fall in same situation that you are in right now. You have to take this budget seriously. Because until you don’t do that, you are going to fall into this loan trap again and again. And number seven, the final and last resort. Settlement. Every loan provider, carries a certain default in his mind. Even if it’s a big bank or a small person, for them, an NPA means Non-Performing Assets there’s a percentage for it, which is included in their business. It is usually in the range of two to four percent. That means if they give 100 loans, they know that out of those two to four loans they won’t be able to repay it.

And they have to settle them. If you are at such a point, where you can’t think of anything, you can’t see anything, there’s no way to take a new loan, there’s no way to generate extra income and repay the loan, no way to increase the tenure of the loan, whatever the case may be. Then, the last resort could be a settlement. The meaning of settlement is whatever your outstanding is, you go to them, you’ll confess that there’s no way you could pay the outstanding.

And you ask them to settle at a smaller amount. They are going to, ofcourse, be very angry. They are going to do everything they can, to get their money. But, if they come to a conclusion that you don’t have the capacity to repay the loan, then they are going to settle. It has happened in my family. There was a time when my father’s credit card bills were so maxed out and we had no way to pay them. And I remember him settling every credit card, one by one by one by one. The biggest damage that it does is, your credit rating will end for a lifetime. Today, there’s no one who is willing to give any loan to my dad. Because there’s a stamp on his history, that he settled for an amount. And that is something that you have to bear in mind. But the settlement is possible. So, if you want to put the credit score aside and get control of your existing life, then settlement is something that you should discuss with your bank, with your credit card company, with your lender that I can’t do it, please settle at a smaller amount.

That is the best that I can do. Go for that. So, these seven ways, to help you get out of a bad loan trap. Something that I have personally gone through and I hope it was useful. Two bonus things. To ensure yourself, god forbid, if this happens to you again, then to cause minimum damage to your family, you have to do two things. Number one, you have to have an emergency fund. You have to contribute towards an emergency fund. That should be for at least six months or ideally twelve months. So, whatever your monthly needs, whatever your monthly expenses are that you have to spend, for you to live your life, the expenses for six months and ideally twelve months, you need to have it. This emergency fund has to be split into three parts, ten percent in cash, so whatever your emergency fund is, out of it, ten percent will always be as cash with you, twenty percent in your bank, it’s in your bank anytime. And seventy percent in your fixed deposit, that is growing slowly, it’s not beating the inflation but the whole purpose of the emergency fund is protection not growing the money.

So, these three will be the split of your emergency fund. Number two is insurance. Health insurance, for everyone in the family. And life insurance for yourself. God forbid if something happens to you, then the worst thing you’ll do is leave your family in this. You can’t do that. You have to ensure that your life is insured. So, if anything happens to you, that we never want, then your family could get such an amount through which they don’t have the need to earn for at least for a few years. And health insurance, in the past two years, if we have learned anything is that there were a lot of families that didn’t have health insurance. And because of covid, they ruined as their hospital bill didn’t stop. You don’t want to be there. So, for yourself, your immediate family, for your parents, health insurance is very important. Because you do not want to be spending money on hospitalization, when somebody else can do it for you.

These seven ways to get out of a bad loan, these two things of an emergency fund and insurance to ensure that if you get stuck at that point then you and your family suffer minimal damage, is my way of trying to help you out of a bad loan. I hope this was useful. Ankur Warikoo, signing off..