No matter how much you avoid taking out a loan, it sometimes becomes a necessity. For example, if you want to get a home and a car but can’t afford them, you need to take out a mortgage and a car loan. However, you should ensure that you can comfortably make repayments.
If your circumstances change and you struggle to repay your installments, you can get deeper into debt as the interest charges and late payment fees continue to accrue. Thankfully, there are many simple and easy-to-follow strategies that will help you be self-sufficient and avoid getting into debt. Here we mention some of those strategies.
1- Use Credit Card Sparingly
You should limit the use of your credit card as you can easily make impulse purchases with it. If you ever use your credit card, you should ensure that you pay your outstanding bill in full and on time to avoid attracting high-interest charges. You should not use your credit card to withdraw cash from ATMs as interest charges are levied right from the moment you withdraw the cash, unlike credit purchases on which interest charges are usually applied to unpaid balances after a month.
Instead of using a credit card, you should use your debit card or cash to reduce the chances of impulse purchases. Also, you won’t have to pay interest charges when you pay with your debit card.
2- Have Emergency and Sinking Funds
When you create emergency and sinking funds, you do not need to take out loans to meet your emergency cash requirements or fund your large purchases. The money in your emergency fund will help you in emergencies, whereas the savings in your sinking fund will help you meet your planned expenses.
3- Create and Stick to Your Budget
You should create a budget and follow it strictly so that you remain within the spending limits set by you. A budget allows you to calculate your monthly income and expenses and then assign limits to how much you can spend on different categories of expenses. If you create a budget but breach it regularly, you need to review and tweak it so that it can serve its purpose. This would eliminate the need for loans and compel you to use your resources for your expenses.
4- Avoid Payday Loans
Payday loans are short-term loans that are payable once you receive your paycheck. If your paycheck is unable to meet your expenses, you might be taking out payday loans to fill the shortfall. However, payday loans charge high interest rates and can disturb your finances if you regularly rely on them to fund your day-to-day expenses.
5- Avoid “Buy Now Pay Later” Schemes
While convenient, “Buy Now Pay Later” (BNPL) can entice you into buying unnecessary things as you don’t have to pay for your purchases immediately, but at a later date. If you don’t repay on time, you might be charged high interest charges and late payment fees on the outstanding amount. Further, missed payments might be reported to credit bureaus, which can impact your credit score as well.
Final Thoughts
While some types of loans such as mortgage and car loans are essential for financing a home or a car, you must ensure you can afford the repayments. If you rely too much on loans, they can quickly overburden you and throw you into a debt spiral. However, you can use different strategies like the ones we mention in the article to avoid getting into unnecessary debt.
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