A debt spiral requires a multi-pronged, proactive approach without which you’ll be pulled deeper into debt. While it will be challenging, you must develop the intent to pay off these loans in full. If you default, settle, or delay, your credit history will suffer and make it difficult for you to borrow in the future.
Start by speaking to a debt counsellor. Loan-related stress is common in India. Professional advice will help you start off your repayment journey strongly by helping you avoid obvious mistakes, such as taking even more loans. Needless to say, further borrowing needs to stop before you sort out the mess you are currently in.
Don’t try to evade your lenders. Have a dialogue with them. They may provide you options that may help. Restructuring, moratoria, refinancing to lower rates, and consolidation of multiple high-interest loans into a single low-interest loan are some of the options you can ask for. Your lenders may not necessarily agree to all these ideas, but it’s important to ask what’s possible. Avoid loan settlements since they will remain on your record and damage your credit score. At the same time, know that your lender may be bound by RBI’s code of conduct and cannot harass you for recovery. Read up on the rights of borrowers to be treated ethically.
Understand the nature of each loan and its applicable charges. You must also ensure that your EMIs are continuing in a timely manner, else your interest and penalties will compound and pull you deeper into debt. There are two methods you can refer to: the avalanche method and the snowball method. In the first, you prioritise debts by interest rates. For instance, credit card dues have the highest rates of interest. Attacking high-rate debt first helps you save interest down the road. In the second method, you attack the smallest debts first regardless of their rates, and move on to bigger ones, thus building momentum with small steps as you tick off one small loan after another.
Lastly, you’ll need to live frugally till your debts are settled. Find funds to pay off your dues. This will happen through a combination of cutting down on your expenses, increasing your income sources, or liquidating an asset to raise cash. If you generate additional income, prioritise loan payments over expenditure. It’s your financial, legal, and moral obligation to repay what you have borrowed. And while a debt spiral can be overwhelming, positive intent helps. Plan your next steps, celebrate small victories, and keep going till you are out of debt.