Follow this simple steps guide to eliminate debts quickly without disturbing your budgets.
Debts can be very dangerous sometimes be it a big corporation or an individual. We should try our level best to avoid being buried under the burden of debts.
What is a debt?
If an Individual or Institution borrows some Money/Assets for a Specified Time Period from any Individual or Institution then the Asset/Money awarded to the Borrower by the Lender is termed as Debt. To Explain in simple terminology a debt occurs when a creditor agrees to lend an asset to the Debtor. In this case the Lender of Asset or Money is Creditor while the Receiver of Asset or Money is Debtor. The debt is a Legal Contract so should be handled with care.
The Debtor (Borrower) has to repay the Asset/Money Acquired from the Creditor (Lender) in most cases with an additional Interest Charge. A debt is Often termed as Loan for longer periods or Credit if the Debt is for a short period of time.
For Example a Credit Card allows the user to purchase goods on credit without the need for rapid on the spot payment for goods acquired but the User has to pay the money back to the Credit Offering Company with an Interest Charge for Delay in the Payment applicable from the date when the transaction has occurred. The Time Period for the repayment Debt is Small (less then One Year) so it is termed as Credit.
If an Individual Acquires Money for the Purchase of lets suppose an Apartment and has to repay the Debt in over an year time then in this case the Debt is termed as Loan.
Debt if not addressed properly is something that is very threatening for an Individual.
Why an Interest is Charged on Debt?
As in the Modern Society we Assume that the Money today has a Value Higher then the value of Money Tomorrow. The Inflation causes hike in Prices and so a person who has money today wants to yield a higher return on his money so that the money retains same value tomorrow.
As to Cope Up with the Inflation Levels an Interest Rate is charged on the Debt to prevent the Creditor from incurring any Losses from the Dwindling Value of Money.
As in the Financial Institutions Various People Invest Money to Yield a Return on their Invested Money. The Return is usually Measured by Return on Investment. So in order to maximize the Money of its Investors a Financial Institutions Usually Invests Money in a way that the Investors Suffer Lowest risk and earn a High Return on their investment.
One way these Financial Institutions Invest Money is through awarding Debts to Corporations or Individuals. The Corporations or Individuals have to pay Interest Charges in addition to the Original Debt Amount.
For Determination of Interest Rate the Financial Institutions utilize the Net Present Value of Money or the Institution’s Cost of Capital. The Interest Charges usually furnish the lenders with the amount of money they would have earned had they invested their money or assets any where else.
Why to Take Debts?
Usually People Borrow Money to fulfill their Everyday Needs like Purchasing an Asset or Paying Fee for the Accomplishment of Some Important Task.
Salaried Persons are Often Found complaining about the Inflation as well as hike in Prices of Consumables that force them to take debts in order to Fulfill their Everyday needs. It is very difficult to keep the living Standards intact during the current recession period especially for the low Salaried Employees.
One should be extremely cautious before taking debts because at the end of the day he has to repay all the Debts with additional Interest Charges. It is better to obtain Interest Free Loan from Somewhere instead of taking loan from Banks and other Institutions that charge an Interest Over the Loan.
Eliminate Debts Simple Steps
If Somebody is buried Under the Burden of Debts then he should follow the simple Steps that could help the Person Get Rid Off his Debts
Better Money Management
Through Better Money Management a person Saves Money from his Income through Eliminating Unwanted Expenditure hence Generating sufficient Savings for Paying Off LumpSum Amount on his Debts.
In this way Debts are Cleared Off Quickly and the Person does not have to rely on Borrowing Money for Clearing the Existing Debts.
Refer to How to Save Money from Better Money Management to get an in depth idea on How to Save Money from Better Management of Finances.
In Better Money management Technique a Person has to
- Construct Realistic Budgets and Maintain a Diary with the Entries of all the Income and Expenses.
- Track the Spots where the Money Could be Saved.
- Monitor his Diary with Care and Needs to respond towards the divergences from the Planned Budgets.
- Ensure that the Expenses do not Exceed the Budgeted Amount.
In this way a Person saves Money on a Monthly Basis from his Income that can be Used to Clear the Debts Quickly hence saving the Monthly Interest Payments.
If a Person adopts Better Money Management Technique and has Multiple Debts in his Account then he needs to follow the Below Mentioned Steps
A person needs to maintain a Separate Diary for Debts Entries and needs to enter all his debts with their Date,Nature,Total Value, Duration, Minimum Payments and Interest Rate.
Choose the Lowest Value Debt:-
The Next task is to Scrutinize the Dairy and pick up Low Valued Debts. Prioritize these Debts according to the Debt at the top with Highest Interest Rate and Lowest Overall Value. Now a Person needs to Accumulate his Savings Up to the Total Amount of the First debt so that the top ranked Debt is cleared. Once this Debt is cleared the process continues until the debt with Highest Overall Value is cleared and the Person feels himself free from Debts.
Benefits of Better Money Management
- This Method allows Quick Re-payment of Debts.
- Interest Payable over Long period of time is saved
Drawbacks of Better Money Management Technique for Eliminating Debts
- This Method requires an Individual to generate Sufficient Amount of Regular Income
- The debts may be too large to handle so this method is ineffective in that particular scenario
Better Debt Management
In this technique when a Person feels he is having difficulty in Paying his Minimum Monthly Payments of Debts or Forecasts such condition in Future he should Contact his creditors before they contact him.
The person Needs to request his creditors for reducing the Minimum Monthly payments and extending the Debt payment time. This Agreement is not Legally Enforceable so the Creditors may retract from their Agreement hence causing difficulty for the Debtor.
Benefits of Better Debt Management:-
- This Technique allows some time for the Debtor to arrange Funds needed for repaying the Debts
- A Person Needs not to Opt for Debt Consolidation
Drawbacks of Better Debt Management
- As the contract is not Legally enforceable so the creditor can refrain from their agreement
- The Duration of the Debt is extended hence causing more Interest payment from the debtor.
- The Credit Rating of an Individual is highly effected.
The above Mentioned Steps are Applicable only to Deal with controllable Debts i.e lower valued Debts. If the debts are Huge for an Individual to handle then the above mentioned Methods will be Ineffective.
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