Need For Debt Management

"Make this the year you tackle that credit card debt once and for all."

Suze Orman

No matter what the circumstance is, always aim to bring your debt to 0% as soon as possible if you want to achieve financial freedom. Those EMIs might not seem much in beginning but unless you pay off those loans, the interest will keep on compounding and you will never escape the loop.

We realized the power of compounding when we were trying to figure out the cost of living post-retirement. Hence it should come as no surprise that the longer you keep your loans on, the more you end up paying.

Here is a table that shows how much you will end up paying for a loan of Rs. 20,00,000 at an interest rate of 10% p.a. compounded annually for periods of 10 years, 15 years, 20 years, and 25 years respectively:

You can see from the above table that if you took the above loan for 25 years, you are paying more than 8X the principal amount as interest!

So, if you try and close your loan in 20 years instead of the stated 25 years, you end up saving Rs. 82 lacs! that is a huge sum of money no matter how you look at it.

Now that we have understood how critical it is to speed up loan payment, the next question arises, which loan to pay first? Here, the priority is to pay off high-interest loans first, because they will add up quickly due to the compounding effect.

Therefore, it cannot be stressed enough times that save money and foreclose your high-interest loans at the earliest. Even if you pay foreclosing charges, you will still end up saving a lot of money! So when you get that next bonus or increment, or your grandma leaves you some money, make sure you pay off your debts first!