A financial necessity in today’s world, loans are a double-edged sword. If managed well, they are a boon, but if handled recklessly, they can easily drain your savings. Borrowers often find it difficult to handle their loans due to various reasons. Let’s look at some simple and effective tips to manage your loans effectively.
Partial prepayments — the best way to go
Getting rid of debt is great for financial health, but you may not always be in a position to repay the loan fully. Using your savings to close a loan will dent your pocket.
In case of a home loan, it is always better to make part payments rather than close it to enjoy tax rebates.
By increasing your equated monthly instalments (EMIs), you can repay the loan much earlier than its full tenure. This will help you save on interest and, at the same time, bring you tax rebates. Any one-time income or windfalls, such as bonuses and gains from real estate or markets, can be used to prepay home loans.
Close the costlier one first
Sometimes, you might be in a situation where you cannot help but go with a personal loan or a credit card cash advance. If the EMI is something you can afford, it is natural for you think: “let it go”. But, remember, the decision to stay with expensive loans till the tenure gets over could prove costly.
If you have taken a home loan at a high rate of interest and your bank is not cutting rates (in line with lower rates being offered by other lenders and better market dynamics), it is a good idea to consider switching the loan to another bank. Banks are always keen on retaining good customers. As a first step, do discuss your concerns with the existing bank to see if you can bargain for a lower rate. This will help you avoid the paperwork for switching to another lender.
Increase the EMI
Do you think you can afford a higher EMI? Ideally, your EMIs should not exceed 40-50% of your monthly income. If your EMI is much lower, increasing it could be an effective way to make sure the loan is repaid early. An increase in EMI can be requested for at any point during the tenure and, usually, there are no charges for it. A R30-lakh, 20-year home loan that comes at an interest rate of 10.5% can be repaid in 15 years if the EMI is increased by an extra R3,200.
Are you finding it difficult to manage your finances with the current debts? You can consult your banker for the step-up option, which allows you to pay a lower EMI initially. The EMI gradually rises over the tenure of the loan. With a step-wise increase in EMIs, the loan does not pinch the pocket as much.
The loan checklist
Prepaying a home loan is better than foreclosing it. If you are finding it difficult to repay the loan, request for the step-down facility (as described above).
A car loan helps you buy a depreciating asset — the sooner you close it, the less costly the vehicle is. Since most car loans come with a prepayment penalty, clearing the balance in the middle of the tenure is better than closing it very early, when the pre-closure penalty will apply for a huge amount. In case of personal loans, get rid of the costlier ones as fast as you can. Convert them to top-up loans, loans against fixed deposits or loans against insurance, which are offered for interest rates of 10-14%.
Borrow only when there is no other option for you — too many loans not only wreck your finances but your credit score as well.
Coming up trumps
* By increasing your home loan EMI, you can repay the loan earlier, saving on interest and enjoying tax rebates
* If your home loan is expensive compared to current rates and the existing lender is not lowering rates, consider switching the loan to another bank. First, discuss your concerns with the existing bank to see if you can bargain
* If your EMIs are a lot less than 40-50% of your monthly income, increase them to repay the loan early
* If you are finding it difficult to manage your finances with the current debts, consult your banker for the step-up
option, which allows you to pay lower EMIs initially. The EMIs rise gradually over the tenure of the loan
* Since most car loans come with a prepayment penalty, clearing the balance in the middle of the tenure is better than closing it very early, when the pre-closure penalty will apply for a huge amount
The writer is CEO, BankBazaar.com