5 steps to managing debt more effectively

#ConsumerEducation

#FinancialAwareness

At the start of every month, Salman gets ready to pay a huge part of his salary to service the installment on the AED 38,000 he borrowed when his brother was visiting from the US. The week after that, he finds himself scrambling to ensure his account has enough money to cover the auto debit on the AED 310,000 finance he took to buy a sports car. He also has top-up finance that he regularly needs to pay off. Missing any one of these lands him with penalties and affects his credit score as well. Salman is under constant stress, arising from his financial situation.

Research demonstrates that almost 75% of borrowers who don’t make repayments say it’s because of financial concerns. What can you do to effectively manage your finances and stay on top of debt repayment?

STEP 1: Do a thorough and honest review: The first step to manage debt is to review what debt you hold. Count all the money that needs to be repaid, including deferred payments, card payments, buy-now-pay-later schemes, personal finance, mortgages, and vehicle finance. If you have more than one card in your wallet, check account statements for all.

STEP 2: Calculate if you need help: The UAE Central Bank has specified that no more than 50% of your monthly income should go into debt repayment. Evaluate how much do you spend totally on debt repayment each month. If you are paying more than what is advised, you need debt management assistance.

STEP 3: Assess repayment tenors: You are likely to pay a higher profit rate on average when you owe multiple amounts to various lenders. This is particularly true in case of card debt. Read your repayment terms carefully to understand whether your current repayments include the principal amount. Check tenors carefully. One way to calculate this is to multiply the number of installments with the tenor to come up with what you will end up paying.

STEP 4: Get expert advice: Check if your bank offers a debt restructuring service or advisor. This will help you assess your multiple finances from the perspective of the varying tenors and profit rates that you are scrambling to track and manage each month. Ask them for advice on how to make this process less painful.

STEP 5: Consolidate your debt: Debt consolidation allows you to reduce the number of repayments you need to make each month to just one. You deal with a single lending institution instead of multiple ones, and at one single profit rate. This also helps improve your credit score and, more importantly, your mental well-being.

Card debt especially can be very expensive to repay. Here is how to recover from overdrawn cards.