Usually, borrowers come with an unpleasant experience to tell about loan tenures that lasted for a long time and growing personal loan interest rate due to a non-payment. People who have multiple debts are the worst hit. Even missing a single EMI hits your credit report and dashes the hope of getting new credit in the future. Have you gone through the same trouble? If yes, you need to change the approach of repaying your loans. Here are some tips that can help you deal with repayment related problems.
Pay off the costliest loan first
Make a list of all outstanding loans first and pay a loan and credit card with the highest interest rate, such as a credit card and a personal loan. This will reduce your interest burden going forward. Pay the maximum amount against the costliest loan without affecting the repayment of other loans. Once you get rid of the costliest credit, you can move on to the next one.
Some people may consider clearing the smallest loan first and then move to the next smallest. This strategy may help decrease the number of loans, but it won’t actually minimize the aggregate debt faster. Channelling additional payment into the most expensive debt reduces the total interest paid on all loans. However, make sure that EMIs on other loans or credit cards are paid regularly.
Some loans have tax benefits which can reduce the effective cost for a borrower. For example, home loan and education loan borrowers can enjoy tax benefits on the interest rate paid. Hence, you should calculate the benefits and repay the loans accordingly.
Increase EMIs with a hike in income
The most practical approach to repaying your credit faster is raise your EMIs with every hike in your income. For example, if you get an 8% increment, you can easily increase EMIs by 5%. The EMI for a 20-year Bank of Baroda home loan of Rs 20 lakh at 11% rate of interest is Rs 20,644. You should increase it by around 5% every year. A 5% increase in EMI will reduce a 20-year loan to just 12 years and save almost Rs. 12 lakh interest rate.
|Year||Bank of Baroda Home Loan EMI (Rs.)||Balance years|
|2||21,676||16 years 5 months|
|3||22,760||12 years 11 months|
|4||23, 898||10 years 10 months|
|6||26,347||7 years 5 months|
|8||29,048||4 years 8 months|
|9||30,500||3 years 6 months|
|10||32,025||2 years 4 months|
|11||33,627||1 years 3 months|
Use bonus and incentive to repay costly loans
If you receive windfall gains, such as bonus, incentives, or maturity proceeds from life insurance policies etc., use it to pay off your credit card debt or personal loans instead of buying luxury items such as a car, phone, laptop, LED TV. Some lenders charge a prepayment fee. Therefore, you should get a personal loan or home loan that does not have a prepayment fee. Suppose if you apply Bank of Baroda personal loan, it does not charge a prepayment fee after six months.
Convert credit card dues to EMIs
Credit cards give you interest-free credit for up to 50 days. As they are easy to use, they can also tempt you to overspend. By failing to repay the credit card dues on time, you will end up paying 3-3.6% interest on the outstanding balance. This boils down to a staggering 36-44% in a year. If your card bill payment has come very large, ask the credit card lenders to convert your dues into EMIs. Most lenders allow customers to pay a big sum in 6-10 EMIs. Doing so will provide you ample time to clear dues. You can also apply Bank of Baroda personal loan to clear your credit card outstanding. A personal loan interest rate is much cheaper than that on credit cards.
Use existing investments to pay debts
If you are caught in a vicious debt cycle, you can use your existing investments to improve it. Borrow loan against shares, equity, debt mutual funds, fixed deposits, LIC, tax-free bonds, PPF to pay your credit card bills or loan EMIs. The PPF (Public Provident Fund) allows investors to get a loan against the balance from the third financial year of investments. Moreover, the interest rate applicable on loan against PPF is much lower than your other loans.
Loan against Securities (LAS) is also available. The interest rate applicable on loan against securities starts from as low as 9.60%, much lower than that on other loans. Also, if you have gold lying idle, it is a smart decision to get a loan against gold to pay the outstanding debts.
Handing different amounts of debt with multiple lenders is not an easy task. You might miss payments on different debts due to a difference in their due date and mode of payment, and end up paying more interest over time owing to higher interest rates. Hence, you should apply a Bank of Baroda personal loan with a much lower interest rate to pay these debts. Use that loan to simplify bill payment by combining multiple debts – usually credit cards – into a single debt. You can get a secured loan at a lower interest rate to clear your outstanding credit. Debt consolidation reduces costs by lowering the interest rate on debt and reducing the monthly payment.
Change your lifestyle
While other ways of reducing the burden of debts have been covered extensively above, you must also adjust your lifestyle by cutting down unnecessary expenses and luxuries to ensure you have sufficient free cash to pay higher EMIs until all debts are paid off. Don’t use a credit card when you go to the shopping mall, use cash instead. Cut down your luxury expenses, such as movie, dining out, costly vacations, expensive celebrations etc.
You need to have the right attitude to manage your debt smartly to reduce your debt burden. Personal loan interest rate is lower than interest rates on a credit card, so you should get a personal loan to pay off your high-interest credit cards.
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