Clear high-cost loans first to minimise interest burden

Alternatively, repay the smallest debt first to gain motivation and momentum

- BINDISHA SARANG

While bad loans in the banking sector have touched a decadal low, nearly 10 per cent of retail borrowers are missing their monthly loan repayments, according to the Reserve Bank of India's (RBI) Financial Stability Report. These borrowers manage to prevent their accounts from being classified as non-performing assets (NPAS) by making some payments before the 90-day deadline. Rising indebtedness (evident from the sharp rise in retail loans) at a time of high inflation is resulting in many households struggling to repay their debts.

Borrowers who miss out on the payment deadlines sometimes have to bear the brunt of harsh collection measures employed by recovery agents. The issue assumes significance in the light of Union Finance Minister Nirmala Sitharaman's recent statement in the Lok Sabha instructing public and private-sector banks to deal with customers with greater sensitivity.

On the eve of Independence Day, here are a few strategies that can help you regain your financial freedom (emerge from a debt trap) and cope with recovery agents.

Prioritise high-cost loan

Most financial planners recommend this strategy, called debt avalanche. First, rank all your loans by interest rate from the highest to the lowest. Make minimum payments on all your loans to avoid a default, then use any surplus you are left with to pre-pay a part of the highest-cost loan. Says Jigar Patel, a member of the Association of Registered Investment Advisors (ARIA): "By paying the minimum amount on all loans, you keep your credit score healthy. And by repaying the highest-cost loan first, you lower your interest cost with each repayment."