Navigating Multiple Debts: A Chartered Accountant’s Advice
Many individuals find themselves managing multiple loans concurrently – a situation a recent LinkedIn post by Chartered Accountant and financial planning professional, Abhishek Walia, brought to light. Walia shared a friend’s predicament: being burdened with a credit card balance, a car loan, and a personal loan, and unsure of the best repayment strategy. He noted this is a common challenge for many in India.
The core issue, Walia explained, isn’t simply making payments, but prioritizing which loans to tackle first. He outlined two popular approaches: the Debt Avalanche and the Debt Snowball.
The Debt Avalanche method focuses on minimizing overall interest paid. Borrowers make minimum payments on all loans, directing any extra funds towards the loan with the highest interest rate. For example, prioritizing a credit card with a 36% annual rate over a 12% car loan. While financially optimal, Walia cautioned that progress can feel slow with large, high-interest debts, potentially impacting motivation.
Conversely, the Debt snowball method prioritizes psychological wins. Borrowers again pay minimums on all loans, but concentrate extra repayments on the loan with the smallest outstanding balance.Clearing a smaller debt, like a car loan with a ₹50,000 balance, first provides a sense of accomplishment and encourages continued repayment. However, this approach may result in paying more interest overall as higher-rate debts linger.
Walia suggests that a blended strategy can be particularly effective. He recommends starting with the Debt Snowball method to quickly eliminate one or two smaller loans for a motivational boost, then transitioning to the Debt Avalanche method to aggressively tackle larger, high-interest debts and maximize savings.
Given India’s high credit card interest rates – often ranging from 36% to 42% annually – the Avalanche method holds a strong financial advantage. However, Walia emphasizes that accomplished debt repayment hinges on discipline and consistency, and the most effective strategy is the one that keeps borrowers motivated enough to achieve financial freedom.