Easy Ways for Debt Management
Debt is the accountability owed by the debtor to the creditor. A debt is generated when a creditor consents to lend a number of assets to a debtor. It is granted with expected repayment in addition to interest.
Debt can be either good debt or bad debt. Debt is good when used to buy productive assets (appreciating or income-generating), generally in the early stages of one’s life to build assets for the future. Proper Debt Management helps keep your financial health intact. Various banks and NBFCs provide loans at low-interest rates which include AXIS Bank, HDFC Bank, Bajaj Finance, etc.
Excessive borrowing can plunder with our personal loan when the cash flows generated are not enough to support the loan repayments. There exist some concepts that you should be aware of before knowing debt management planning points
1) Debt Ratio – This ratio is your total liabilities divided by your total assets.
Debt Ratio = Total Liabilities / Total Assets
The lower the debt ratio, the better it is. At a point where your liabilities and assets are equal your debt ratio is 1, and where liabilities are higher than your assets, your debt ratio is higher than 1 and vice versa.
2) Debt Coverage Ratio – It is calculated by dividing the monthly amount of money available for household expenses by the monthly amount payable for long-term debt.
Some of the ways that can reduce the debt coverage ratio are:
- Assets and liabilities compatibility – It is advisable not to finance a long-term asset, such as a home, with a short-term loan. You cannot use the value of your home to pay the bill. Borrowing long-term for a short-term asset can also create trouble too.
- Maintain liquid savings – It’s not always possible to match liabilities and assets. That’s when it becomes tempting to go for liquid savings. Refinancing your mortgage at a cheaper rate can be a beneficial step, but you may require dipping into savings to pay out-of-pocket. It is a great idea if you can directly begin rebuilding your liquid savings.
- Check the interest rate risk – The cost of your loan will rise as market rates go up if you borrow at a variable interest rate. So it is advisable to plan for higher loan costs down the road.
- Reducing the debt – Paying off debt is great if you are cutting debt at the expense of socking away retirement savings you will end up disappointed years from now. It may be wise to pay down your debts more slowly, especially if that plan offers an employer match.
- Minimize regular debt expense – There are debts available that are serviced each month. Thus, it is not easy to avoid regular expense. The larger the expenses are, the less elasticity you will experience. So it may be smart to eliminate debt—even while loan rates seem favorable.
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Special Note: An individual must examine the whole EMI amount payable to the lender with the Personal loan EMI calculator.
