He earns ₹75,000 a month, which isn’t a bad salary at all, but he has a home loan, a car loan, a personal loan, and credit card EMIs.
Adding up all these EMIs, it comes to ₹45,000 a month, leaving him with only ₹30,000 to manage his monthly expenses. In other words, Rahul is working hard to earn ₹75,000 a month, but ₹45,000 of that is going to the bank. And Rahul isn’t alone; every week, in the Money Matters forum, I hear stories of nothing but debt, debt, and more debt.
So, in this video, we’ll first try to understand what the loan trap is, how to get out of this trap, and what two methods I often suggest and that you can also use to get rid of all your loans, one loan at a time. First, let’s understand how big a trap loans really are. Loan marketing always talks about easy EMIs, light on your salary, own a lot with only ₹989 per lakh, something like that. But banks will never show you the complete picture because that picture is terrifying. Let me show you. Suppose you’ve taken a ₹75 lakh home loan at 8% interest. If you take this loan for 10 years, which in my opinion is what you should do, your EMI will be around ₹93,000, which is a big amount. You might think, “Wow, ₹1 lakh a month is going out!” But look at what happens: the principal amount or the loan amount remains the same, ₹75 lakhs, but you’ll pay only ₹36 lakhs in interest during this 10-year period. That’s roughly half of the loan amount.
But if you extend the home loan from 10 years to 30 years, the bank will tell you that your EMI will be only ₹57,669.
“Sir, where would you pay ₹1 lakh?
Half the EMI!” They won’t show you the complete picture… You have to pay ₹75 lakhs, but in interest alone, you’ll pay ₹1 crore 32 lakhs over those 30 years. That means almost three times the initial ₹75 lakhs. You’ll pay a total of ₹2 crore 7 lakhs to the bank. This is the reality. Every loan traps you in this cycle; it shows you a small monthly amount, but you never truly realize its huge impact. Then comes the second thing. You say, “Okay, you know what, we’ll be smart. We’ll keep it for only 10 years,” because you think you can afford to pay ₹93,000. Great. The next step is that all these bank loans work on a reducing balance amount, which means that most of the initial part of the loan’s EMI goes towards paying the interest, not the principal. And then it’s only towards the end of the loan period that your loan actually starts getting paid off on the principal amount.
In other words, if I tell you that it’s a 10-year loan and the loan amount is ₹75 lakhs, what do you think? How many lakhs of that ₹75 lakhs would you have already paid to the bank in 5 years? And you’ll intuitively think that half of it must be paid by now, right? But that’s not true. Let’s look at what actually happens. So if you start from April 2025, you’ll see how this works. And let’s go down to April 2030. So April 2030, that is, 5 years after the loan, you would think that you would have paid roughly ₹7 lakhs to the bank. But no, your remaining amount will still be ₹44,71,000. And why? Because in the beginning, if we look at 2025, the first EMI of ₹92,000 has ₹53,000 as interest and only ₹40,000 as the principal amount.
And this is the reality:
in the early parts of the loan, which, by the way, is not something wrong, but the loan is designed this way, the interest is charged first, and the principal later. And as you keep completing the years, let’s say when you… Come to 2034, the payment you’ll be making in a year, or rather, in a month, sorry, a very small amount of that will go towards interest, and the majority will go towards the principal. Which is why I also say this: whenever you’re paying off a loan, the best time to pay it off is at the beginning. If you’re paying off the loan at the end, you’re essentially just paying back your own money quickly.
Why would you do that?
Take as long as you want, but if you pay off the loan at the beginning, you actually save on a lot of interest. You save a lot of interest that you wouldn’t save towards the later part of the loan. So now that we understand loans, let’s try and come up with a plan on how to clear these loans in four steps. Step number one: Create a detailed account of all your loans or all your outstanding debts on an Excel sheet.
And for each loan, I need five things.
What do I need? For yourself, you need to know: Number one, what was the loan amount?
Number two, how much amount is remaining?
Number three, how many EMIs are remaining?
Number four, what is the monthly EMI amount?
And number five, what is the interest rate of this loan?
In this same process, you will calculate your debt-to-income ratio, meaning what is your monthly salary, what are your total EMIs, and what is the ratio of those EMIs to your salary? Step number two: Now, the method for paying off these loans. Research has shown that a person who adopts a method or process for paying off each loan individually is able to pay off those loans more effectively than someone who is trying to pay off all the loans simultaneously all the time. That strategy, unfortunately, does not work. So yes, there is a minimum EMI for each loan that is being paid, but whatever…
You’ll receive an extra amount, but you don’t have to distribute it across all your loans. You have to pick one loan at a time and decide which loan you’ll pay off first. Now, how do you pick that loan? There are two methods. Method number one is the Avalanche method. Imagine a huge, icy mountain, and a massive snowball is rolling down. It basically starts with the biggest thing out there. So, we start with the biggest loan, whichever loan has the highest interest rate or the highest EMI. We’ll try to pay that off first. The second method is called the Snowball method. Imagine a small snowball rolling down a mountain.
As it rolls, it gets bigger and bigger and bigger, and by the time it reaches the bottom, it’s huge. So, we’ll start small and work our way up. We’ll start with the loan that has the lowest EMI. Now, both have their pros and cons. The first one, the Avalanche method, its positive is that the biggest loan will be paid off first, so you’ll save the most interest, and the burden of the highest EMI will be reduced. Of course. But the con or the difficulty is that it might take a very long time to pay off that loan because it’s the biggest loan by definition. The second one is a bit of a psychological hack. In the Snowball method, you’ll close out the smaller loans first, so psychologically, it will feel like, “Okay, this loan is paid off, this loan is paid off, this loan is paid off,” and then you’ll ultimately get to the bigger loan. But the flip side is that the bigger loan will have accumulated a lot more interest by that point. So, you may end up paying a lot more.
If you personally ask me, I liked the Snowball method the best out of these two methods because for someone who is burdened by debt, achieving victory over each individual loan is very, very impactful psychologically. That’s my recommendation, but let’s see how this works. So, this is an Excel sheet. Let’s say your first loan is… You have a loan of ₹10,000 with a 15% interest rate for 36 months, and your EMI is ₹347. Your second loan is for ₹1 lakh at 9% interest for 5 years, and its EMI is approximately ₹275. You can pay a total of ₹3000 every month.
So, if you are currently paying an average of ₹2422, then around ₹578 is left. In our avalanche method, you would say, “No, we will close loan number two first because it’s the largest.” Let’s see what actually happens. If you let both loans continue as they are, without any prepayment, you will spend a total of ₹2984 in interest on both loans. If you use the snowball method, meaning you try to clear the first or smaller loan first, you will pay a total interest of ₹24157, or around ₹24000. If you use the avalanche method, you will pay a total interest of approximately ₹2565 or ₹2564. So you will have this kind of saving. ₹2800 will be saved in the first method, and ₹1300 in the second method.
Now, it’s possible that some people don’t have the capacity to pay higher EMIs. In this case, we saw that your EMI was around ₹2400, and you can pay up to ₹3000. So, where do you put that extra ₹600? You have this option. Let’s say you don’t have that option. For that, there’s a third step or a third strategy: debt consolidation or loan consolidation. What does this mean? Try to consolidate all your higher interest rate loans, which are mostly credit card loans, into a single lower interest rate loan. For example, your credit card interest is 35, 40, sometimes even 50%, while a personal loan is available at 14 or 15%. So, take a personal loan to pay off all your credit card loans at once. Let’s say the personal loan is at 14-15%. However, if you own a house, you can take a loan against property, which will come at 8, 9, or 10%, whereas a personal loan is at 14-15%.
That will make a huge difference. So, try to replace any loan with a higher interest rate with a loan with a lower interest rate, which is called loan consolidation. Number two, you can use or try balance transfers. Many credit cards offer you the option of transferring from one credit card to another, giving you a discount and reducing your EMIs. So, you can avail of those options. Thirdly, you can refinance the loan itself. Suppose you have a home loan running at 9%, but interest rates have fallen. You might be able to get that home loan from another bank at 8.5% or 8.75%. This might not seem worthwhile, but if you get a 1% lower interest rate on a 50 lakh loan, over a period of time, that translates into 5 lakhs of interest saved.
And the fourth option, which surprisingly works, is to negotiate with your existing lender. Tell them you want a better interest rate, tell them you want a longer tenure, tell them you are unable to pay and need a moratorium (a period during which you won’t pay the EMIs). And quite often, they will agree because getting the money back is far more important for them than risking losing it altogether. And finally, this is frankly the best strategy of all: a financial audit of your life, which is strategy number four. First, a money leak audit: keep a record of every place you spend money every day.
Because of UPI, we end up spending ₹100 here, ₹150 there, ₹17 here, ₹221 there, and we don’t even realize where the money went. I talk to so many people who have no idea where their ₹4,000, ₹5,000, or ₹6,000 a month goes. One person I was doing a money matters session with later realized that they were spending ₹7,000 a month just on food delivery orders. So, identify these money leaks. Number two, temporary lifestyle adjustments.
Can you switch to a cheaper mobile plan?
Can you cancel any OTT subscriptions?
Can you cancel the subscription to any software that you don’t actively use? Is there any personal expense that you incur every month that you can stop for a few months? I’m asking you to make some short-term sacrifices so that you have some extra money that you can use for payments and clear your debts. Then, of course, generating additional income. Just this morning, we were talking to Garima, who came on Money Matters. She earns ₹30,000 a month and is managing her expenses well, but I told her that if she could earn another ₹4,000 or ₹5,000, her entire investment strategy would change.
Now, where can that ₹4,000 or ₹5,000 come from?
You can give tuition, you can help children with their homework. She wants to start a cloud kitchen because she’s interested in cooking, so she can do that. You can do freelancing, you can pick up projects, anything that gets you additional income so that this additional income can be diverted to clearing your loans. And finally, the very important windfall rule. Whenever we get a sudden influx of money, there’s a very high tendency to splurge that amount, to buy something we’ve been thinking about for a long time, or to just waste the money on something that doesn’t have any high return.
The windfall rule simply says that whenever you get an annual bonus, or some random money comes in from somewhere, which you weren’t expecting… Expecting and so on, at least 50% and ideally 70% of that should go towards loan repayment. You can spend the remaining 30% guilt-free, it’s your money, and you should. But at least 50%, ideally 70%, you should definitely use to clear that loan. And finally, a rockstar method: if you have surplus money, this has been our best-performing video, and I’m showing a summarized version of that video here. The video was titled “How you can pay off a 25-year home loan in just 10 years,” and the headline is this: any home loan, which is usually the longest tenure loan we take, has the highest interest component, and that’s what hurts us the most. A great strategy to reduce that interest component is if you increase your EMI by 10% every year. So you go to the bank and say, “I want to increase my EMI by 10% every year,” because you can, of course, afford it.
So, let’s say your EMI is ₹30,000. You go to the bank and say, “From next year, deduct ₹33,000,” and the additional ₹3,000 should be used to reduce the principal amount, meaning the tenure should be reduced. I don’t need to reduce the EMI; in fact, I’m increasing the EMI. And every year you pay one additional EMI, meaning 13 EMIs instead of 12. So, if your EMI was ₹30,000, after paying 12 EMIs, go to the bank and say, “Here’s another ₹30,000, and reduce the principal amount; I don’t want to reduce the EMI.” If you have a 10% step-up and you pay one additional EMI every year, your 25-year loan will be paid off in just 10 years. You will save 60% on the interest you would pay to the bank.
It’s an incredible strategy if you have the money, and I would love for you to try it. Use it, because of course, you can also take out loans with it, and you can pay off a 25-year loan in just 10 years and be in charge of your money. I truly want no one to be burdened by debt. I saw a lot of this in my childhood. My father used credit cards, and of course, he used them for the right things because in that environment, it felt like we needed to get out of the middle class. We needed a washing machine, a music system, this and that, and we spent money when we didn’t have it. And then we got caught in the trap of credit cards. We had three or four credit cards, loan sharks were calling repeatedly, our checks were bouncing, payments weren’t being made, they were showing up at our house, physically threatening us.
I saw all of this with my own eyes, and I wouldn’t wish the same for anyone because I know how short life feels when you’re burdened by these loans. When you know you have so much debt to so many people, and you just don’t know how to even begin, you feel like life is over. But I can tell you with conviction that if you face these loans with an open mind, take a deep breath, and create a strategy, slowly, not overnight, but gradually, these loans will be paid off. We paid off our business loans, my education loan, our home loan, everything, little by little. It took time. All my loans were finally paid off when I was 40 years old. But I was able to do it. It was an incredibly large amount, which if I had looked at it when I started paying off the loans at the age of 24, there’s no way I could have ever said with this much confidence that these loans would be paid off. But it took 16 years, 16 years to pay off all the loans.
And at the age of 40, when I became debt-free for the first time, it felt like I was truly free for the first time in my life. And that’s the kind of freedom I want every person to experience in their life. On that note. My fourth book on careers is written in a very simple, relatable, and practical way. I wish someone had given me this book when I was 24 years old and completely confused about what to do with my career and what direction to take in my life. I wrote this book for that 24-year-old.
