About Debts.

About Debts - Money Matters.

We all know the importance of money. Nothing works without it. When we don't have money, we borrow it. The borrowed money becomes debt. We can borrow money from anybody who is willing to lend. The lender could be an individual who may be a friend, a relative or somebody we know or a bank or co-operative society.

When we discuss debts, we talk about the borrower and not about the lender. The lender lends money and waits for the borrower to return the amount either full or in installments which also includes the interest. The borrower has the obligation to repay the principal amount and the interest as per the terms and conditions of repayment.

Meaning of Debt.

Debt does not mean just owing money to the lender. It has other connotations too. When we take the help or a service of an individual or a firm on credit, we owe them the money which is the price for that service. This price has to be paid against their bill. So long as we are using their products or services on credit, we remain in debt.

When somebody receives a service or some goods for free, the element of debt is neutralized. In such instances, there are no debts. The recipient does not pay anything in return other than gratitude because it is a gift. The term 'free' is often misunderstood as something which has no value. We cannot give or receive anything for free if it does not have any value. Everything has a value and everything valuable has a price. So, when we receive something for free, eventhough we don't have to pay its price, it has a value.

Rate of Interest.

The rate of interest plays a crucial role in deciding the burden of debt. The lender sets the interest rate before lending money. As the borrower has to pay the interest on the borrowed amount, the rate of interest has to be within his capacity. The rate of interest has to be reasonable. If the rate of interest is too high, then nobody will borrow money.

The lender may not solicit interest on the amount he lends if the borrower is his friend or relative or somebody whom he knows well. This happens only when the lender is an individual and not an organisation. If the lender is an organisation, then collecting interest will always be their priority. A borrower should always enquire about the rate of interest from the lender before borrowing.

The Purpose of Borrowing.

There should be a purpose behind borrowing money. The borrowed money should fulfil the purpose. If the money is not utilized for the purpose for which it was borrowed, it is likely to get spent in some other way. This could lead to financial problems later on as the individual who borrowed money will be left with no funds to complete his task.

Therefore we should borrow money by considering our needs and ensure that the money is utilized appropriately for the purpose for which it was meant. We should never spend the funds for other purposes.

Repayment Tenure of Borrowed Money.

We should select a loan repayment tenure which suites us. If we prefer to take a loan repayment tenure which is less, then we have to pay a higher amount as EMI, but the overall amount that has to be paid as interest will be less. Whereas, if we prefer an extended repayment tenure on loans, then the EMI will be low, but the overall amount which we have to pay as interest will be high.

Source of Borrowing.

We should borrow money from a trusted source only. Whenever the need arise to borrow money, we should always go for the most trusted lender. We should enquire about their lending credentials and their reputation in the field and ensure that the policy that they follow are clean and transparent. We should read their terms and conditions carefully and clear all doubts before borrowing.

Paying the Due Amount.

Paying the due amount in time is very important to reduce and manage debts. When we pay our EMI on time, we reduce the chances of becoming a loan defaulter. When we take a loan, the EMI becomes the most important expenditure. If we mark EMI as the first expenditure of the month and set it aside for repayment, then default will not happen. When we follow this procedure every month till the end of the loan tenure, we free ourselves from debts.

Management of Debts.

Debt, if not managed, could become a trap. Debt is like a chain which becomes longer and longer as we borrow. As debt forces people to borrow more, the chain becomes so lengthy that it becomes a trap. Every borrower should know this to avoid getting trapped in it.

Debt could make a man poor and so it has to be managed well. Managing debts is crucial for financial well being. Borrowing money or taking a loan is justified when we don't have money, but the loan should never become a burden.

We can manage debts in following manner:

(1) Ensure regular income: We should ensure regular income. Money should be available for repayment of debts. This is most important. We should be aware of our capacity to repay before taking loans. We should have adequate income to meet our expenses, our savings and for paying EMI if we go for a loan. Therefore regular earning is necessary for proper management of debts.

(2) Reduce expenditures: We should have a proper plan for controlling expenditures. As repaying debt becomes the most important and unavoidable expenditure if we borrow money, we have to control other expenses to reduce cash crunch.

(3) Save money in debt: The third one is to make provision for saving money. Some money has to be saved every month irrespective of the liability. Saving money even in debt actually help the borrower to overcome his liabilities.

(4) Don't make borrowing a habit: Borrowing becomes a habit if it isn't controlled. Sometimes, circumstances force people to borrow more when they have an existing debt. This may help them for a while, but it will eventually lead them to become habitual borrowers. Borrowing every time and for every need is not a good practice. If we manage money properly, we can get out of debts and could avoid becoming a debtor again.

Everybody wants freedom but debts hamper freedom. There is always a sense of anxiety associated with debts which robs mental peace. We should not allow debts to rob our inner peace and freedom. Debts should not be with us lifelong. We should live free - free from debt.

We can manage debts and achieve financial freedom. Proper planning and disciplined efforts will help us to overcome debts and live peacefully.

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The previous post was about expenditures.

The next post is about our assets.

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