Loan Repayment Strategies for Investors

Imagine you are hiking a mountain with a heavy backpack. 🎒 You're excited, motivated, and ready to reach the top. But soon after, you realise that the heavy load you're carrying is slowing you down, making you tired, and the mountain harder to climb.

That's what it's like for people with a baggage of debt. These liabilities make the journey long, tiresome, and unpleasant. And the extra baggage is bound to hurt you in the long term. 🤕

If you think I am making this sound too serious, then let me tell you a cautionary tale of an acquaintance. Ravi, an employed individual with a 5-figure salary, underestimated the consequences of being careless with his finances, and this 👇 is how his life fell apart.  

Just like Ravi, credit card defaults are one of the most common cases that involve people falling into the infamous debt trap. If you look at the figures, credit card defaults have risen from ₹3,122 crore in FY22 to ₹4,073 crore in FY23, portraying a rise of around ₹951 crore in just one year. 😲

This article will help you avoid this terrible situation or come out of this phenomenon safe and sound (if you are a casualty). We will be discussing some of the most effective strategies that have helped many relieve their load of debt and accomplish financial goals flawlessly.  

Without further ado, let's get started with the…

Tried & Tested Strategies for Loan Repayments

Let's begin with the most efficient strategies of them.

Debt Consolidation:

Allow me to ask you a hypothetical question. If given the choice between working an extra 30 minutes every day or doing 2-3 hours of overtime on one day of the week, which would you choose?

(If you said "30 minutes every day," I question your sanity. 🤨)

Now, debt consolidation works the same way. It's similar to bundling all your overtime into one day so you can pay off your debt faster and with less hassle. In professional terms, debt consolidation refers to taking out a new loan to pay off the existing loans.

An ideal adult freshly entering the corporate world has a myriad of loans to take care of. Education loan, credit card payments, car loan, and other liabilities (depending upon the individual) makes up the monthly bill entries for them.

Suppose you have to make payments for 2-3 credit cards; then, as per debt consolidation, you can apply for a new credit card with better interest rates & benefits. By doing so, you could pay off other debts with the new card as well as enjoy amazing benefits.

In the end, you will be left with just one loan, reducing your load and stress. If you are still not convinced, then check out the many advantages debt consolidation has to offer.

Pros of Debt Consolidation

• It could provide better payoff terms, such as a lower interest rate, lower monthly payments, or a combination of both.
• It could lead to a reduction in stress with a decrease in the number of loan amounts to be paid.
• Many creditors also find the scheme better, as with it, the likelihood of debtors paying off the loans would increase simultaneously.

But, beware of certain factors while going ahead with this strategy.

Cons of Debt Consolidation

• The interest rate for the new debt (say credit card) could be higher than what you are paying for.
• This method does not guarantee financial stability, as you will still have to make timely payments.

Wish to know more about the strategy? No worries! I have got you covered. Just click here for an even deeper dive into debt consolidation. 🤿

If you are not in favour of getting a loan to pay off previous debts, then here is a strategy to gradually reduce them. 👇

Debt Avalanche & Debt Snowball Method

Everyone has different preferences when it comes to completing a task. You either could be an early bird like me who prefers handling high-priority tasks in early mornings 🌄. On the other hand, you could be a night owl who can’t bother waking up early and thus can stay up late burning the midnight oil 🌃.

For people with varying tastes, different debt repayment strategies are available to pay off debt quickly. Let’s see which are the ones that would suit your palate:

a. Debt Avalanche Method

Just like a real-life avalanche, the debt avalanche method allows you to deal with the biggest liability at first and then take care of the minor inconveniences in due time. It might require you to pay off an extra amount every month so that you can deal with the loan ASAP.

Hence, this method is not ideal for those who don’t have some emergency fund or savings stashed. Plus, if you procrastinate your tasks, then this strategy would be challenging to comply with.

Looks like Debt Avalanche is not for people like me. 😮‍💨 But no worries, we still have the…

b. Debt Snowball Method

This method allows you to sort the smallest loans at first and then lead on to paying off the highest debts at the end. It’s pretty similar to how one makes a big snowball by starting off with a small globe of ice. ☃️

As the small loans are taken care of, the debt snowball method helps boost the borrower's motivation. However, the interest on the debt might increase with the delay in paying off the debt with the highest interest.

I guess Debt Snowball is more suitable for procrastinators like me. After all, we are just savouring the anticipation of those better days ahead, aren't we?😅

Now that we discussed the strategies to reduce the heavy load of liabilities let me present you with a bonus tip. 🤌

Investments via Rupee Cost Averaging

I know, I know, you must be thinking, why am I suggesting investing more money when you already have debts to take care of? But, for this scenario, you will have to call out to your internal telescope and look at things from a faraway perspective. The thing is, investments, when done right, always bear fruits filled with the sweetness of positive returns.  

And I am not asking you to bet all your life’s savings into the stock market. Instead, I would suggest you make small fixed investments at regular intervals. This method is known as Rupee Cost Averaging. It was designed to protect investors from the volatility of the stock market as much as possible.

What happens in Rupee Cost Averaging is that you invest a fixed amount, say ₹5,000, in regular intervals, regardless of the investment's price. This strategy will allow you to buy more shares when prices are low and fewer shares when prices are high, potentially reducing the overall average cost of your investment over time.  

Let me elaborate on the concept via an example:

As per the data above, the investor contributed ₹60,000 in a year and acquired various units at different NAVs (Net Asset Value). Hence, Rupee Cost Averaging can help mitigate the impact of market volatility and potentially lead to a more favourable long-term investment outcome.

I understand that investing with debt can be challenging, but it is not impossible. So, strengthen your spirits and be persistent because the result will be worth the hardships.

The Bottom Line

There are many other ways to manage your debt, among which the most common one is never to skip an EMI payment. The above-discussed strategies will help you level the playing field, relieve your burden and achieve your financial goals as well.
So, what are you waiting for? Pick one or more of these strategies based on your goals and liabilities and get started.