5 Solutions to Come Out of Debt That Don't Work

When drowning in debt, one is likely to be desperate to find quick fix solutions to repay debt and stay afloat. It is natural to tell yourself: 'Let me get out this mess this one last time and I will be debt free forever.' However, in the desperation to make things right, one may end up making some mistakes that actually do more harm than good.

Being neck deep in debt is never a happy feeling, but unfortunately there is no magic wand that can make you debt-free. If you are desperate to get out of debt, you will have to cut corners and be patient till you repay your dues. Quick fix solutions almost never work.

So here are five debt repayment strategies that can backfire:

1) Dipping into retirement savings

There is a reason why all financial advisors maintain that you must start saving for your retirement as soon as you start earning. If you have been doing so little by little - building up a corpus to serve you well in your golden years, you should leave it undisturbed under all circumstances till you reach your retirement age. Paying off unsecured debt with your retirement savings is a bad idea and your entire financial plans may go haywire because of the same.

2) Milking home equity

When you are in debt and have a property of your own, you may be tempted to refinance your home or avail of a new loan at an amount that is higher than the old loan. For instance, if the value of your property is Rs 20, 00,000 and you owe your lender Rs 13, 00,000, you can refinance Rs 15, 00,000 and take out Rs 2, 00,000 in cash. You may think of your home equity as a temporary lifeline, but you are actually exposing yourself to a higher risk in such a case.

In case there is a mishap that results in the stoppage of your regular flow of income, you may stand to lose your home. Trading one debt for another may only be justified in case you are looking at re-adjustments in your EMI or want to avail of a lower rate of interest. Therefore, using the refinance route to pay off your unsecured debt is never a good idea.

3) Transferring balance to a new credit card

This is another case of a debt swap that people often think will help them get out of debt faster. A credit card issuer may be luring you with 'lower rates' but keep in mind that those lower rates may be introductory rates to lure in a customer and are applicable for only the first few months. Besides, there is a processing fee that is usually 1-2 per cent of the total outstanding amount being transferred onto the new card. You may think that you are debt-free when you receive a cheque from your new card issuer to clear the loan of your previous card issuer, but that is in fact a myth. If you cannot curtail your spending habits and continue to be reckless with your new card, you will land up with an unmanageable debt pile once again.

4) Borrowing money from family or friends

Let's say you have a very supportive family or a group of friends whom you can count on for just about anything in life. But remember: When money gets in the way of relationships, even the best of relationships can get sour. One should think very carefully before asking your family or friends for money to bail out of your debt pile.

5) Filling for settlement

When nothing seems to be working and you are at your wits end, you may decide to settle your loan or credit card debt. Your bank will accept settlement of your loan, but this does not mean you are let off scot-free. The price you pay will show up in your Cibil report and impact your Cibil score negatively. Besides, this settled loan or credit card debt will affect your Cibil score for the next seven years and remain on your Cibil report forever, thus making it impossible for you to avail of any kind of credit facility in this interim. No bank would willingly give a loan to you if you have settled you loan or credit card dues once.

These are the hacks, which many individuals often think can get them out of a debt trap, can actually backfire, and may end up costing you much more than you imagine. Instead, if you have ended up in a debt pile, take a practical approach and see if you can liquidate some assets or investments to pay off your dues. If that does not seem possible, take up some extra part time jobs that will supplement your income. Keeping your head down and working hard through this period of crisis will see you through.

Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.