Manage Your Debt Amid Fears of a Looming Recession | Personal Loan Stories - Kotak Mahindra Bank
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The fears of a looming recession are everywhere. And these are not just baseless fears – the World Bank has predicted a global recession in 2023. The anticipated global GDP growth rate of 1.7% is the slowest pace since 1993 outside of the 2009 and 2020 recessions. For an economy, a recession means slowing economic growth, higher levels of unemployment, lower consumer spending, less credit flow, and fewer investments from businesses. But what does a recession mean for you?

During times of economic uncertainty, it’s important for you to cut back on your discretionary spending, increase your emergency funds, avoid any risky career moves, hedge investment portfolio risks, and manage your debt effectively. And in this piece, take a look at how you can manage your debt at a time like this to be well-prepared for what’s to come. 

  • Why is it important to focus on debt management?

With record-high inflation levels, the central bank increases interest rates by adopting a contractionary monetary policy. This can increase the interest you have to pay on loans with floating rates. 

In addition to this, job cuts and hiring freezes are part and parcel of a recession. Hence, most individuals want to ensure that they don’t have too much debt obligation to take care of in times of recession as in the event of a loss of income, it will become difficult to meet the Equated Monthly Instalment (EMI) dues. 

Hence, due to these reasons, it’s prudent to take a good look at your current debt and see ways in which you can best manage it before a recession hits and makes the economic and financial environment even more volatile and difficult. 

  • How to manage debt during a recession?

1. Review all debt

The first thing you need to do is review all outstanding debt you have currently. This is to determine how many more EMIs you have left to be paid, which loans are high-interest loans, and if you are falling behind on any dues. As you do this, you also need to review your budget. This is a crucial step because you need to identify if you can cut down on your monthly spending to have enough funds to pay off either partially or fully certain high-interest debt such as credit card bills. 

2. Do not use your savings 

While paying down debt before a recession is important, you should not use your savings and investments to do so. That is usually not a wise strategy. The only time that may be a good option is when you have a loan which has such a high interest that it is bleeding you dry. In such a situation, using surplus funds to pay off this debt and save on the interest cost may be more beneficial than earning returns through an investment that have a rate of return lower than the rate of interest you are paying on the loan. 

But other than for such high-interest loans, you should avoid dipping into your savings or selling your investments. Also, note that markets such as the stock market are especially volatile during economic uncertainty. So, you don’t want to sell your equity investments at a lower price and bear capital losses. 

3. Consider debt consolidation

Instead of dipping into your savings or struggling to create more space in your budget, you can consider debt consolidation. This is a process whereby you take one personal loan to consolidate all your different loans. This means instead of paying several different EMIs with different interest rates and tenures, you now only have to pay one EMI. Debt consolidation through a personal loan makes managing debt easier and more convenient. For debt consolidation, calculate your total debt obligation. That number will be the amount of personal loan you need to apply for. 

Then, use a personal loan EMI calculator to assess how much your EMI amount will be. When you consolidate your debt through a personal loan, you can also opt for more favourable loan terms such as negotiate a lower interest rate with the lender if your credit score is high or change your loan tenure to make it more comfortable for you to meet your dues. 

4. Look into a balance transfer 

For some loans, such as a home loan, that have a long tenure, looking into a balance transfer might be a good option. If over the last few years your credit score has increased and so has your income, you can negotiate a lower rate of interest on your loan with a new lender. If you do get approved for a lower interest rate, then you can transfer your home loan from your existing lender to the new lender and reduce your overall interest burden. Most types of loans, including personal loans, have the balance transfer option. Hence, you should look into that for your existing debt. 

  • The best way to manage debt going forward

Opting for a personal loan for debt consolidation is one of the best ways to manage debt without disturbing other aspects of your finances such as your monthly spending and investments. It’s also important to not miss any of your loan EMIs or reach a point later when you have to settle the loan. The latter has a significant and long-term negative impact on your credit score and reduces your personal loan eligibility to apply for a loans for as long as seven years. Hence, it’s best to consolidate debt early on to manage it effectively despite the given macroeconomic conditions. 

You can apply for personal loan online or offline, though the personal loan apply online process is a lot quicker and more convenient. Once you hit on the personal loan apply button, you only have a few steps to take care of in the application process. The best part about a personal loan is that you can use the funds for whatever purpose you need. So, there are no restrictions regarding what loans and bills you can pay using the personal loan funds. Hence, in addition to paying the debt you owe to lenders, you can also use the money to pay off any loans you took from friends and family or any bills that have mounted up. 

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.