Loans or credit cards in any form help you in every aspect of your daily life; be it buying assets that you cannot normally buy with your income or savings, meeting emergency situations or even building a better career.
India is slowly moving from a savings- focused, debt-averse country to a consumption focused economy. This consumption is often met out of loans. Penetration of fintech firms and easing of lending norms by the banks have led to easier availability of loans for many.
While it has become easier to avail loans or credit, it is very much necessary to understand that the repayment has to be done by the borrower within all the deadlines.
Through this post of ours, we try to bring in certain pointers that can help you clear off your loans with ease.
Separate Budget For Your EMIs
Once a loan is availed, you have a legal commitment to ensure that your EMIs are paid promptly. If you find that your expenses are eating into your EMIs consistently, ensure you create a separate budget for your EMIs.
If possible, you can create a Charge Off facility (This facility ensures that your employer pays off the EMI. amount to your lender before crediting your salary account). You could also schedule your EMI debit or payment to take place near to your date of salary credit so that it is paid off first before you withdraw your salary for other expenses.
It is very important that you pay your EMIs on time to ensure that you do not incur late payment fee and penal interest, which will create a further drag on your finances. And take a hit on your credit score too.
Pay The Loans With Higher Rate of Interest First
If you have more than one loan that you are looking to clear off, we bring you a simple tip.
You may know that there are loans for different purposes, like a personal loan which is unsecured with open-ended usage or a home loan which is secured against the home bought from the loan, or a gold loan which has a collateral tied to it.
In the similar manner, each loan is priced or charged a different rate of interest according to the risk attached with that particular lending. Generally, secured loans are charged lower rate of interest than the unsecured loans, since there is security provided by the borrower which can be sold to compensate for the loan in case the borrower fails to repay the loan amount. As the common logic goes, higher the rate of interest, higher will be your EMIs.
So, if you have more than 1 loan, pay off the one with the highest rate of interest first. By doing so you will be paying less amount as interest.
In addition, it is also good to evaluate the income tax benefits that come along with the loan. For Ex: Home loan and education loan come with tax rebates which can give you some savings.
Go In For Debt Consolidation Loans
If you are saddled with multiple debts and are struggling to pay off the EMIs and keep missing an EMI here and there, our next tip is for you.
You can opt for something called as Debt Consolidation Loans. These loans are created for your convenience. Debt Consolidation Loans bring together various loans with different rates of interest into one single loan with a fixed rate of interest.
Generally, you can club in your credit card outstanding and personal loan in these kinds of loans. However, you would need to check that the rate of interest on the debt consolidation loan is lower than your earlier loans. By opting for these consolidation loans, you may end up with a loan that has a lower rate of interest and also would need to pay one single EMI which makes it easier for you to manage your finances.
Learn more in detail about how debt consolidation loans work and how you can benefit from them.
Refinancing your Loan
Refinancing your loan, especially the ones with longer tenures or big amounts is a perfectly good idea to ease your process of repayment.
Many times, when the loan is approved, it is done at a higher rate of interest due to various reasons like not-so-healthy credit score or not-so-good financial position of the borrower. However, subsequently, there may be an improvement in the situation warranting better rates of interest. Or it could be a loan availed when the rate of interest was substantially higher and there has been a subsequent drop in interest.
In these cases, individuals can think of refinancing your existing loan. By refinancing, we mean that your existing loan is replaced by a new loan with better rate of interest.
Essentially it is like taking a new loan but in refinancing, the customer transfers his/her existing balance to a loan with a new rate of interest/tenure, either, with the existing lender or a new lender.
Refinancing proves extremely beneficial if you have found a substantially lower interest rate. However, please do your calculations to ensure that even after paying the processing and other fees, you are saving some money by refinancing.
Additional Reading: All you need to know about refinancing Student Loan Debt
Prepay Your Loans
Prepaying your entire loan or even smaller portions of the loan is an excellent strategy to ensure that you can finish off your loan much earlier than the original tenure. By doing so, you can save quite a bit.
This option particularly helps when the tenure is longer or when the rate of interest charged is on the higher end, which is true for home loans or personal loans. In both the cases, you can choose to repay a small amount of your loan each year or save up to pay the entire amount in one shot.
Points to be kept in mind here are that certain loans like personal loans have a lock-in period of 1 year during which you cannot prepay a loan.
However, in case of floating rate Home loans, RBI has instructed the banks not to charge penalty on prepayment of home loans. This is where you stand to gain tremendously by saving on the interest cost.
Increasing your EMIs as your salary / income increases is also another easier way to ensure that you can finish off your loan comfortably.
We would like to end by reiterating that it is good to borrow only as much as you can comfortably pay back and would like to remind you to pay your EMIs promptly so that you remain credit healthy for future borrowings.