I’m a 55-year-old government employee. I have four loans (three personal and one car) totalling Rs 35 lakh. Three loans will be over when I retire at 60, and one will be over after three years. Around 70 per cent of my salary is going towards repaying the loans. I am not able to meet my monthly expenses. Should I take VRS or continue paying my loan until I am 60, as my retirement corpus will take a hit if I take VRS? Please help me with the best possible solution. What should I do?
Reply By Adhil Shetty, CEO of BankBazaar.com
Your situation requires a multi-pronged approach to debt reduction. Start by comprehensively evaluating your current financial situation. Consider your income, expenses, and debts. Get professional advice if you can. This would help you avoid costly mistakes that could compound your debts.
The advisor should also help you understand the long-term math in the VRS option. If you exhaust your VRS compensation servicing your debts, check if this would create sustenance issues later. If so, would it be better for you to work till 60 and make significant progress on—or even pay off—the loans?
Next, speak with your lenders about ways to make the payments easier – restructuring, refinancing to a lower rate, EMI reduction or tenor enhancement, or consolidating multiple high-interest loans into one low-interest one. Once this is out of the way, let’s get to payments.
Adopt a positive frame of mind. Compounding debt is challenging but not impossible to get out of. You could consider two techniques: the snowball technique or the avalanche technique. In first, focus on paying off the smallest loans first. Once that’s paid, move on to the next biggest loan. Celebrate little wins, build momentum, and gradually accelerate out of debt in the five years to retirement. In the avalanche method, you attack the highest-interest loans first. In both cases, beware of prepayment charges.
Find a way to improve your cash flows, even if temporarily so. Sell an asset or liquidate an investment. Dip into your PF if necessary. If the car loan is weighing you down, sell the car. You can repurchase it again once your situation gets better. Pick up a temporary job. Teach a course. Open a business on the side. The better your cash flow, the easier it becomes to pay off the loans.
Thirdly, while this seems the hardest to do, reduce your expenses. Every rupee you save is a rupee you can use to lower your dues. Needless to say, avoid the urge to take more loans, especially any loans to pay off existing loans.
(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)