Rank loans, save money, seek advice: Strategies to get out of debt

Recovery agents cannot harass debtors and have to take consent before visiting them

State-run banks' credit card bad loans doubled to 18 per cent, says the central bank’s Financial Stability Report (FSR) released on June 29. Data from the FSR showed that the non-performing assets (NPA), or bad loans, for credit cards increased from 9 per cent in March 2022 to 18 percent in March 2023.

Art director Nitin Desai, who died of suicide this week, had a loan of Rs 252 crore. Here are a few strategies to get out of debt.

Debt avalanche

This is the strategy most financial planners recommend. Rank all your loans by interest rate: from the highest to the lowest. Make minimum payments on all loans to avoid a default, and use the surplus you are left with to pre-pay a part of the debt that carries the highest interest rate. "While paying the minimum amount on all loans, you keep your credit score healthy, and by paying the highest interest loan first, overall interest is getting lower at every repayment," says Jigar Patel, member of the Association of Registered Investment Advisors (ARIA).

"Stay disciplined in following the order and avoid unnecessary spending to maintain momentum," says Raj Khosla, founder and managing director (MD) of MyMoneyMantra.com, a physical-digital marketplace for loans, mortgages, and credit cards.

Debt snowball

Pay off your debt in the order of smallest to largest balance, regardless of interest rate. Make minimum payments on all loans. With the money left, focus on paying off your smallest debt first. When that is paid, move on to the next smallest and so on. "Paying off the smallest loan will improve your confidence," says Patel. "Debt is also a behavioural and psychological issue, not just a mathematical one. Note that this strategy is more expensive than avalanche and may even take longer, and researchers for the Harvard Business Review found that the snowball method proved to be the most effective strategy,”. 

Credit card balance

For paying credit card bills, a balance transfer works well. Swap the high-interest credit card debts for friendlier ones. "Through a balance transfer, you move your existing credit card debt to a new card with lower interest, that is, shifting to a smoother terrain. This gives you breathing room to pay off the principal without being weighed down by sky-high interest," says Col. Sanjeev Govila (retd), chief executive officer (CEO) of Hum Fauji Initiatives, a financial planning firm.

For instance, a monthly interest rate of 0.99 percent can be levied for the first six months, after which the standard card interest rates apply. 

Debt consolidation

Consolidation is taking out a fresh loan to clear all existing debts and liabilities. It allows you to combine multiple small debts into one loan. "This may also come with more favourable repayment terms, such as lower interest rates and affordable EMIs. It also allows you to keep a tab on your overall debts efficiently and simplifies your repayment process as there are fewer payments to track and repay,” says Adhil Shetty, CEO of BankBazaar, an online marketplace for financial products. 

Consolidation is a good alternative if you have multiple unsecured debts with high interest rates. "Carefully assess terms and fees to ensure the consolidation actually reduces your overall costs," Khosla says.

Strategies can be combined to pay loans, according to Patel. Credit card debt can be consolidated using a balance transfer for preferential terms, say 0 per cent interest for six months. "Snowball and avalanche strategies can be combined," he says.

Such a strategy uses an additional amount (after paying the minimum amount of all other loans) for first paying off the smallest loan and then the largest, keeping a balance between reducing interest rates and increasing confidence. 

Debt uses an aging schedule: 1-30 days past due, 30-60 days past due and 60-90 days past due, and more than 90 days past due (a loan becomes NPA then). Recovery agents shape their dunning, which is the process by which lenders try to collect payment owed to them by customers, as the debt moves towards NPA mode. But that does not mean you should abuse it. "The Reserve Bank of India has framed guidelines setting out the responsibilities of the entities employing recovery agents. These guidelines also provide a grievance redressal mechanism that is to be provided by the banks and financial institutions. Banks, as principals, must be and are held responsible for the actions of their agents," says Shashank Agarwal, an advocate at the Delhi High Court.

If you can't pay EMIs due to financial hardship, contact your lender and explore possible solutions. "Recovery agents often resort to mental harassment and intimidation to recover the loan amounts. In case the loan recovery agents do not comply with and act in accordance with the guidelines issued by RBI, the borrower can lodge a complaint," says Apoorva Bhadang, partner at Vesta Legal, a law firm.

"A defaulter's legal rights include receiving notice, fair debt collection practices, grievance redressal, seeking legal assistance, fair credit reporting, the right to privacy, the right to a fair hearing, and the right to restructure one’s loan," says Abhinay Sharma, managing partner at ASL, a law firm.

"Recovery agents cannot make threatening or anonymous calls, send inappropriate messages to borrowers in any form, must obtain borrowers' consent before visiting them at their homes or workplaces," says Sharma.

If your loan overwhelms you, reach out to financial advisors or a credit counselling agency. 

• How to deal with recovery agents
  
  
  Document everything: Keep a record of all calls, emails, and text messages from the recovery agent. This will help you if you need to file a complaint later
   
  Ask the agent to identify themselves: Make sure you know who you're talking to and who they're representing
• Ask the agent to stop contacting you: If the agent is harassing you, politely ask them to stop contacting you. If they continue to contact you, you can file a complaint.

File a complaint: If the recovery agent is harassing you, you can file a complaint with the Reserve Bank of India (RBI), the bank, or the police

Get legal help: If you're being harassed by a loan recovery agent, you may want to consider getting legal help. A lawyer can help you understand your rights and file a complaint if necessary