Living our lives beyond our means will surely make us go beyond our debt-taking capacity, which would leave us with zero savings and assets. When we borrow far more than what we can manage, we come to the brink of a financial disaster, which has been aptly shown in a movie titled “Confessions of a Shopaholic.”
As mentioned above, high-end fashion so insanely lured a young, beautiful woman named Rebecca that she started making excess purchases using her credit cards and ended up accumulating credit ranging in lacs with zero means to pay them off.
In the end, she had to sell off all the fashion accessories and clothes, which she dearly bought to clear off all the credit card dues. In reality, if you are caught up in the same situation as Rebecca, you too might have to sell off all your precious assets to get rid of the debt burden.
Therefore, if you too have taken up multiple bank loans, you must contemplate finding ways to manage all your loans effectively and repay them comfortably. Read our five smart ways of managing bank loans and make repayments in a disciplined manner to live a debt-free life.
5 Smart Ways For You To Follow And Manage Your Bank Loans Better
1. Pay off high-interest loans first:
Start by prioritizing the repayment of your loans. You should make a list of all your outstanding loans and then recognize those that need to be repaid first. Usually, you must start by repaying high-interest loans first. Ideally, personal loans and credit card loans are loans with the highest interest rates.
Paying the costliest loans first will help you reduce your interest burden as you move forward. You should pay the maximum amount that you can afford of the highest cost loan due without hampering the repayment of other loans.
Once you’ve cleared off your highest cost loan, move to pay off the second-highest costliest loan, and so on. This method of paying loans is called the ‘debt avalanche.’
2. If your income rises, increase your EMI amount:
Increasing your EMI with an increase in your income is the simplest way to repay your loans faster. For example, if you get a raise of 10%, you quickly increase your EMI by 5%. For a 20 year home loan of Rs. 20 Lakh at 11% interest, the EMI comes to Rs. 20,644. So, it would help if you increased your EMI by Rs. 1,000 every year.
Even if you increase 5% in your EMI, you will end your 20 year loan period in just 12 years, which will help you save approximately rs. 12 lakh in interest. Whenever you see arise in your sources of income, you must prioritize prepayment of loans. In the case of multiple loans, you must direct your additional income in paying the costliest loan first, as discussed in the point above.
3. To repay costly debt, use windfall gains:
Windfall gains are monetary gains received in a lump sum. For example, maturity proceeds from bonds and life insurance policies, income tax refunds, proceeds from selling assets, or even bonuses. You must use such windfall gains to pay costly loans, like personal loans or credit card loans.
By using windfall gains towards payment of loans will decrease the loan amount substantially. However, a disadvantage here is that your lender of up to 2% may levy a prepayment charge on the loan amount, which is outstanding. Although, lending banks are reluctant to impose any prepayment penalty if the prepayment amount paid is below 25% of the debt due at the beginning of the year.
If you are likely to be charged with the penalty, compare the cost of the penalty with the interest you save on prepayment and then make a decision.
4. Use current investments to repay debts:
When your debt burden increases, you must use your existing investments to clear them off. For instance, you can borrow money against your PPF or life insurance policy to clear off your loans. If you borrow against PPF, you can take a loan against the PPF balance after the second financial year of investment, which you have to repay within three years after borrowing.
The maximum amount you can borrow against PPF is up to 25% of the balance available at the end of the previous year. An interest rate of 2% over and above the prevailing PPF interest rate will be charged as interest on the loan. When the need arises, you can even use your gold holdings to repay your loans. For example, if you possess substantial gold jewelry, you can consider borrowing against the same and get rid of high-paying loans.
5. Refinance or Consolidate:
Missing an EMI payment results in a bad credit score and penal interest. And, keeping track of EMI and interest rate changes when you have multiple loans can be challenging. So, why not consider consolidating all your loans? Refinancing or consolidation loans means combining several loans into a single loan.
Under refinancing, you get a loan with a much lower interest rate than you pay on your existing loans. Moreover, under one single loan, you will have greater ease in repayment. For example, suppose you have a huge outstanding bill amount across several credit cards. In that case, you can approach another lender for a personal loan of the amount that constitutes the whole credit card due amount. You can repay this entire personal loan at a much lower interest rate than your credit card rate.
Experts say that borrowers should substitute their unsecured, costly loans with secured loans that are economical. For example, if you own a freehold property, you can consolidate your vehicle or personal loans by taking a loan against that freehold property. Through this consolidation, you can select the comfortable loan tenure and an EMI that you can afford.
Bank loans are serious financial commitments, which you should only take up when you are confident that you can repay them on time along with interest alongside other expenses. You require proper planning and research to procure the loan at the best interest rate and flexible tenure. Live a disciplined and decent lifestyle because it will help you repay what you’ve borrowed and simultaneously allow you to live a debt-free life.
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