Debt is a good way of using other’s money for self-growth but some people use debt for pleasure which can put their long-term financial happiness at risk.
People who cannot manage their loans get trapped into a vicious cycle of financial burden which not only affects their financial freedom but also their ability to secure future loans.
Getting out of loans can be difficult especially when the person’s income is less but expenditure is more.
In case, you are trapped in such a case, don’t worry, you can get out of a loan if you follow some basic guidelines.
In this article, we will discuss How to Get Out of a Loan, the difference between good debt and bad debt, and much more.
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Difference: Good Debt vs. Bad Debt
Traditionally many people consider debt as a bad thing that can put you at risk of going bankrupt. This way of thinking is extremely limiting and reduces a lot of opportunities.
The primary thing that you’ll have to develop to grow financially is to build a growth mindset. A growth mindset focuses on the growth opportunity that comes with a debt and focuses on debt management rather than the debt burden.
In personal finance, understanding the difference between good debt and bad debt is extremely important which is the soul of any financial management process.
Here are the major differences between Good Debt and Bad Debt.
| Factors | Good Debt | Bad Debt |
| Interest Rate | The interest rate of Good Debt is always nominal and adheres to the industry standards. | Bad Debt is usually high-interest debt which often puts a lot of financial burden on individual |
| Used for | Good debt is used for business, asset purchases, etc. It basically puts money into your pocket. | Bad debt is used for pleasure and useless expenditures like purchasing cars, smartphones, etc. |
| Monthly EMI | The monthly EMI of good Debt is usually below 30% of your income making the payments very comfortable. | The monthly EMI of the Bad debt can make you pay anywhere from 70-90% which crunches your cash flow. |
7 Ways to Get Out of Loan
Here are the 7 ways you can get out of a loan-
Consolidate your Loans
There are different types of loans that you can take like home loans, car loans, etc. All these loans can be of different interest rates some with lower interest rates and some with higher interest rates.
The best way to keep getting out of loans is to consolidate the loan in one place especially all the loans which are high interest rate loans.
Usually, loans like personal loans, and mortgage loans are of high interest rates, you can pay off these loans by taking a personal loan with a lower interest rate.
Before making any debt consolidation, you’ll have to do a thorough Cost-benefit analysis and calculate the overall cost.
Pay Expensive Loan First
Since, different type of loans comes with a different interest rate, to get out of a loan fast, you’ll need to pay the expensive loan first.
Any loan that charges more than an 18% interest rate is a high-cost loan and should be paid immediately.
Follow a Budget
90% of the bad financial situation is the direct result of a mismanagement of the budget. Either people do not make any budget or they do not follow it religiously.
This is a huge mistake that anyone can make regarding their financial situation. Before taking any loan, you’ll have to ensure that the repayment of the loan fits your budget.
Increase Your Income
The best way of paying off your debt is to increase your income. When you develop different sources of income for you, you’ll be able to pay off your exisiting debt.
High net-worth individuals usually take a lot of debt but since their income is from multiple channels, they can repay the loan without much of the financial burden.
This is where your financial mindset plays a huge role. If your mindset is right, you’ll only go into debt to purchase an asset.
For instance- if you buy a property by going into debt, you’ll be able to offset your Monthy EMI with the rental income earned which improves your ability to make money for the long term.
Do not Take Fresh Loans
If you are already under a lot of loans then a smart thing to do is to not take any fresh loan. If you keep on piling up loan after loan then you’ll never be able to repay your loan and live a financially free life.
Debt Refinancing or Debt Restructuring
In case the loans that you have accumulated are putting a lot of pressure on your pocket, the best way of managing that type of loan is either Debt Finance or Debt restructuring.
Debt Refinancing is refinancing your loan from the bank which can be used to pay off a loan that is of a high interest rate. This way you’ll be able to save some money.
Another method which is like a last resort is the Debt Restructuring. You can restructure your loans by talking to banks regarding your inability to repay the loan.
This will impact your credit score negatively but could save you from going bankrupt. Debt Restructuring should be the last resort in cases when repayment of the loan is tough for you.
Seek Professional Help
If you are unable to manage your finances well, then you can always seek professional help from a financial advisor. A financial advisor provides you with in-depth knowledge about your finances and provides you with a proper plan to get out of debt.
Financial advisors usually evaluate your current debt, income, current financial standing, etc., and prepare a custom plan for you.
Conclusion
Managing your debt is a skill and you can always learn it. Remember, the best way of getting out of debt is to increase your sources of income.
You can take debt to create a passive source of income for yourself. There are other investment options as well like real estate, business investment, etc. which have huge potential in increasing your income and putting income into your pocket.
Once you have a steady and constant flow of income from a particular source, you can pay off the debt easily and take new debt to explore new sources of income.
Apart from income sources, you should also have a good sense of managing the debt using a proper budget.
Budget can help you by providing you a base using which you can pay off your debt easily. It can dictate your purchasing and would keep you aware of your financial standing regularly.
I’m Shiv Kumar, a graduate with a passion for finance, marketing, and technology. My journey into finance started with a desire to understand money management and investing.
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