It’s great news if you’ve applied for a personal loan or had a personal loan approved recently. However, don’t let that take away from the fact that the loan repayment in itself is a liability, and you would do well to ensure that you don’t misuse or mishandle your loan. Even missing a single EMI can cast a slur on your credit report, and therefore it is imperative that you plan out your personal loan repayments from the very get-go. Before you apply for a personal loan, read on to learn how you can manage your debts without letting them burden your wallet.
1. Prioritize high-interest loans
The first step, as a part of your loan repayment process, should be to identify loans that are of high priority. Pay the maximum amount you can pay on high-cost loans, that is, on loans with the highest interest rates. When the most expensive debts are reduced by making additional payments, it affords you the opportunity to minimize the total interest to be paid on loans. This technique of reducing the total interest paid is often referred to as the ‘debt avalanche’ technique or ‘the stack method’. In contrast, when people try to repay smaller loans off first, they may reduce the number of loans but do nothing to reduce their aggregate debt faster.
2. Use windfall gains and rises in income to repay costly debts
Income raises and windfall gains such as income tax refunds, salary bonuses or maturity proceeds can be used wisely for the prepayment of loans. This can significantly reduce the tenure of the loan and help ease the burden on your wallet. On a loan amount of 20 lakhs at an annual interest rate of 11% for instance, even a 2% increase in EMI every year (coinciding with a rise in income) can reduce the term by 5 years. There are already EMI plans in the market designed to help you do this – Tata Capital’s Step-Up Flexi EMI Plan, for instance, is designed to incorporate changes in income flow as a part of the EMI repayment plan.
3. Avoid poor repayment practices and do not add further debts to your portfolio
It is a worrying habit of debtors who accumulate loans, to further keep adding debts to their portfolio. This is a recipe for disaster and often stems from poor loan repayment practices. Poor EMI practices may arise from a general lack of self-control and discipline towards debt repayment. This leads to unjustified expenses and overspending, ultimately leading to late payments of EMIs. This not only leads to poor credit scores but accrues late payment charges, leading to a vicious cycle of long-term debt.
4. Plan out late payments and form good spending practices
One way to deal with late EMI payments is to inform the bank in advance to possibly secure an extension on the due date. If it is a recurring issue however, you can seek loan consolidation and transfer your personal loan to a new loan at a lower interest rate. In general, it is good practice to maintain discipline on spending habits and reduce expenses, while simultaneously looking at means to increase income sources. A good way to maintain discipline over spending habits is to track your expenses. Tracking expenses makes it easy to identify unnecessary expenses and help you plan out ways to avoid the same in the future. This will help ensure you stick to your personal loan repayment schedule.
5. Use the loan for its intended purpose
Often people use up their loans, especially personal loans on a number of small expenses. When this happens, there is a lack of funds available for the original purpose and more often than not leaves the debtor stranded, and unable to repay the lender.
Choosing the right personal loan from the offset is important. It is imperative that the loan you choose has appropriate options that help you reduce your EMI and debts as and when possible. This is an essential part of planning your personal loan repayment. When choosing a personal loan, ensure that you are maximizing loan utility and minimizing expenditure on interest rates. Identify your repayment plan at an early stage (preferably before you undertake the loan) and make sure you stick to your plan by maintaining a level of discipline over your expenditures.