What is bad debt and how can you avoid it?

Summary: A bad debt is a loan amount that cannot be recovered and is written off. Such debts negatively affect your credit score, which can make it difficult for you to apply for new loans

04 May 2023 by IDFC FIRST Bank

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A borrower may not plan on going into bad debt, but in certain situations, they might face a financial emergency that makes it difficult to repay their loans on time. Bad debts can negatively impact the borrower's credit score, making it harder for them to obtain credit in the future. This is why it is imperative to repay a loan on time without delays.

Today, loans are easily accessible and can be applied from anywhere. You should, however, ensure that you choose a loan plan that fits your budget so that repayment goes smoothly without any hassles. Let's dive further into the meaning of bad debts and how to avoid them.

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What is the meaning of bad debt?

‘Bad debt’ is a term used for the loan amount that cannot be recovered and is written off by the bank. Any form of loan, whether for personal or business purposes, can turn into bad debt if the borrower is unable to repay the borrowed amount. Banks and financial organisations can exercise bad debt recovery methods to reclaim their loans, such as selling the borrower’s assets which have been placed as collateral.

Bad debts affect your credit score adversely and can be a problem when applying for loans in the future.

To avoid falling into bad debt, you must plan your finances before opting for a loan or credit product. Search for affordable options such as IDFC FIRST Bank Personal Loans with low-interest rates and minimal processing charges. There are also flexible repayment tenures of up to 60 months to make it easier for you to repay your loans. Late payment fees are kept to a minimum to make the loan affordable.

Ways to avoid bad debt

Here are a few common ways to avoid bad debts.

Set a budget

The first thing you need to do before applying for a loan is prepare a budget as this will help you keep track of your expenses. You can use an EMI calculator to learn how much the loan will cost each month and then choose a repayment period that suits your needs.

If you have multiple loans, rank various debts in terms of priority and pay off the most important debts first. Try and keep expenses to a minimum so that you can use most of your income towards clearing EMIs.
Avoid taking multiple loans

If you already have current EMIs to be paid, taking on more loans will only add to your repayment burden. If you are finding difficulty repaying multiple debts, one effective solution is to consolidate your debts and focus on paying one loan’s EMIs.
Build an emergency fund

Financial advisors always stress the importance of building an emergency fund. If you are in debt and are experiencing financial difficulties, your emergency fund can assist you in clearing the loan's EMIs while you get back on your feet. Having a financial backup can be very helpful if you need it in the future.

Lastly, you can also seek professional assistance in managing your financial health. A debt advisor can give you options on how to pay off your debt conveniently. Several banks also offer extended moratorium periods, so it is best to speak with your lender about possible options to ease your loan repayment.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

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