Having a loan comes with repayment commitment, non-adherence to which can adversely impact your financial wellbeing.
A loan can help you meet financial shortfalls and fulfil goals that cannot be met with our own resources. However, having a loan comes with repayment commitment, non-adherence to which can adversely impact your financial wellbeing.
Following these five simple tips can help you manage your loan burden:
1. Avoid irregularities in EMI payments
Timely repayment of loan EMIs and credit card dues receives the highest weightage among all the factors considered by the credit bureaus while calculating your credit score. Hence, develop the habit of repaying EMIs by their due date. Failure to repay the dues on time can attract hefty charges and a relatively higher interest rate. In addition to this, non-repayment of EMIs on time can also have a negative impact on your credit score and future loan and credit card eligibility prospects.
2. Include loan EMIs in the emergency fund
The primary purpose of creating and maintaining an adequate emergency fund is to deal with unforeseen financial exigencies like sudden job loss, severe illness, disability or other adverse events. Ideally, the size of our emergency fund should be equal to at least six months’ unavoidable monthly expenses, including rent, insurance premiums, EMIs, etc.
Having adequate emergency funds would make it easier for you to continue repaying EMIs during financial exigencies, and thereby save you from incurring late payment penalty, higher interest cost or adverse impact on credit score.
3. Opt for balance transfer whenever feasible
Balance transfer option allows you to transfer your existing loan to other lenders at a lower interest rate. This helps in reducing the overall interest cost and EMI burden. Existing loan borrowers having significant residual loan tenure should compare the interest rate levied on their loan with those extended by other lenders. The best way to do so is by visiting online financial marketplaces. These platforms fetch loan offers available from various lenders based on your credit score, monthly income, job profile, employer profile and other facets of your credit profile.
Try to negotiate with your existing lender to reduce the interest cost, in case the interest rate extended by other lenders leads to significant savings in your existing loan’s overall interest cost. Go ahead with the balance transfer option if your existing lender refuses to lower the rate.
Also, before exercising the balance transfer option, make sure you factor in applicable prepayment charges, if any, levied by your existing lender, and processing fee and other associated charges levied by the new lender. Go ahead with the balance transfer option only if the overall savings on interest cost significantly outweigh the associated costs.
4. Prepay loan when you have surplus funds
Prepaying a loan can derive significant savings in the interest cost, especially if you do so during the initial years of the loan. Try to prepay the loan whenever you have surplus funds. In case you are servicing multiple loans, try to prepay the loan with a higher interest rate first.
Before prepaying any loan, make sure you factor in applicable prepayment charges (if any). Although the RBI debars lenders from levying prepayment charges on floating rate loans, they are free to levy prepayment charges on fixed-rate loans. Go ahead with the prepayment option only if the savings in the overall interest cost significantly exceed charges levied on loan prepayment, if any.
You must also desist from prepaying or foreclosing a loan by utilizing your emergency fund or investments earmarked for crucial financial goals. Doing so can force you to avail costlier loans to deal with financial exigencies or to achieve those crucial financial goals.
5. Periodically review your credit report
Credit report summarizes your loan and credit card-related activities, as reported by the lenders and credit card issuers. Credit bureaus calculate your credit score based on the information captured in your credit report. Thus, any error on part of the lender or bureau or even a fraudulent activity in your credit accounts can adversely impact your credit score. The only way to mitigate this risk is by pulling out your credit report at periodic intervals.
Frequently reviewing your credit report, ideally at least once in three months, can help access customized and pre-approved loans, balance transfer and credit card offers based on your credit profile.
(By Gaurav Aggarwal, Senior Director, Paisabazaar.com)