Loans are a great tool to fulfil desires that your regular income cannot. But an unplanned loan has the potential to put you in a debt trap. Thus for a healthy financially life, it is important to take a timely remedial step to reduce your loan burden.
Let us understand this better with an example. Mr. ‘A’ took an unnecessary loan after giving into a bank’s offer for a pre-approved car loan up to Rs. 10 lakh. His existing car was in perfect condition and there was no need to sell it. Still, after receiving the bank’s offer, he decided to sell the existing car and buy a new one. Mr. A ignored the fact that a new loan would impact his other financial objectives such as saving for his retirement. The bank’s loan offer may seem enticing, but it should be considered only when you need financial support to accomplish an essential goals.
We discuss here some important tips to help you to reduce your loan burden.
EMI Should Be Light On Your Pocket
Before you apply for a loan, you must assess how big an EMI you can comfortably repay and accordingly decide the tenure of the loan. Do not take on more loans than you can easily repay, else the chances of defaulting would be high. The best way you can assess your borrowing capacity is by assessing the money you are left with after meeting your regular expenses, including savings, investments, and taxes.
It is important to note here that failing to repay EMIs on time would impact your credit score and may affect your chances of loans in future. So, assess your EMI repayment capacity carefully before you apply for a loan.
Tenure Should Be Flexible
You should be flexible in fixing a tenure for your loan. As your income increases with time, your repayment capacity increases, and you can easily repay the loan ahead of your schedule and save a lot of interest. Whereas if you find it difficult to repay the EMIs, work with your lender to have your tenure increased so your EMI becomes smaller.
Get Adequate Insurance For Big Loans
When you take a big-ticket loan, adequate insurance cover can protect you from several risks which if uncovered can negatively impact your loan repayment capacity. For example, a disability insurance cover can help a recently disabled person get the sum insured for meeting his regular expenses as well as to pay his EMIs. Similarly, a life term policy can help the dependents of the borrower repay the loan EMI if the borrower dies during the policy period. So, it makes sense to stay properly insured and reduce the loan stress that may arise from future uncertainties.
Freedom To Switch The Loan
Interest rates on a loan may not remain the same during the entire loan tenure. If your lender increases the interest more than the prevalent market rates, do not hesitate to switch the loan to another lender to reduce your EMI load. You must assess the pros and cons of transferring the loan. Usually, it is better to switch the loan during the initial phase of the loan to maximise interest savings. If you switch in the last leg of the loan, your savings may be minimal and you will lose any useful tax benefits. Also, analyse the impact of prepayment penalty in mind when you switch the loan.
Opt For Debt Consolidation
Managing multiple loans can be a difficult task. In such scenario, you may opt for consolidating all the loans into one. For example, you may have a personal loan, loan against gold, credit card loan, car loan etc. For all the loans the EMI dates and the interest rates may vary. A missed EMI can spoil your credit score. So you can request your bank to consolidate all the loans into one or you can apply for a loan against security to repay all the small and high interest loans and bring down the total number of loans to one or two. While consolidating loans, always check the impact of prepayment penalty levied by the banks.
Bringing down the number of loans can relieve you from huge loan stress. You must check the interest on the final loan before you go for a debt consolidation.
If you take a loan and have a sound financial debt management plan, you can easily keep the loan stress at bay.
The writer is CEO, BankBazaar.