Quick Tips: How to prepare for a worsening economic scenario if you have loans?

Having sufficient cash reserves at hand can make a lot of difference in case you are faced with any economic uncertainty.

If you are worried about economic instability due to the resurgence of the pandemic, there are certain steps you can take to minimise the impact. If you have any loans running right now, there are three things you can do: Augment your emergency fund, reduce your debt, and improve your credit score.

Having sufficient cash reserves at hand can make a lot of difference in case you are faced with any economic uncertainty. “Usually, most people put away six months’ salary as an emergency fund. Use this time to increase your emergency corpus to up a year’s salary. This means that you will have sufficient funds at hand and so you needn’t worry about your EMIs for a much longer time in case you suffer from any reversals,” says Adhil Shetty, CEO, BankBazaar.com.

Secondly, try to reduce your existing debt as much as possible. This does not mean you attempt to close all your existing loans at the cost of your investments. Instead, take a more systematic approach. Collate all your debts and then look through them carefully. Figure out the best way to close the most expensive ones, such as a personal loan, a credit card loan, or any unpaid revolving credit. These are the most expensive loans, and it makes fiscal sense to close these as early as possible.

“This would also mean you have fewer liabilities to contend with in case of an economic reversal. It would be best to accelerate their repayments, but if you are planning to dip into your investments, make sure you go for the ones that give you the lowest returns. It will also free up your credit limit, which can be very helpful if you need credit in the future months,” advises Shetty.

Above all, take this time to build a stellar credit score. Having a good credit score will make it easier for you to get an extension on your existing line of credit in case you find yourself in need of some extra credit during an economic downturn.