Credit instruments such as loans and credit cards help us buy homes, automobiles, education, and even lifestyle choices such as clothes, gadgets and holidays. If you have a steady flow of monthly income, repaying your debts is rarely a challenge. However, actively managing your debt can help you secure interest savings and become debt-free quicker. Here are some ideas to accomplish this.
Take stock & prioritise debt
How many unpaid loan and credit card balances do you have? Take stock of the various loans you’ve taken over the years. Note the current interest rate on each, as well as the repayment tenure left. Now prioritise the loans you want to settle soon. For example, your credit card balance may have a high-interest rate of 40%, and even a small balance could drain your finances. Therefore, you should prioritise its repayment first. On the other hand, your home loan rate may be just 9%, and you also get useful income tax deductions. Therefore, it makes sense to keep this loan longer.
Make pre-payments actively
The best way to settle your loans is to actively pre-pay on it. A pre-payment is a principal payment over and above your EMIs. Periodic pre-payment can significantly reduce your interest payment. Suppose, you have borrowed Rs 40 lakh for 240 months at 9.5%, with an EMI of Rs 34,713. Your total interest repayment over 20 years would be Rs 43.31 lakh. But if you pre-paid just Rs 1 lakh along with your 13th EMI, your total interest drops to Rs 39.56 lakh, and your loan tenure reduces to 227 months.
Pause further credit card use
If you have a burgeoning credit card debt, consider pausing its use for a few days. The more you use your credit card while you’re still in credit card debt, the quicker your interest payments will increase, pulling you into a debt trap that would be hard to exit. Therefore, go back to cash or debit cards while you try to pay off your credit card debt. Once you’re free, try and stick to 20-30% of your spending limit
every month to keep your card debt manageable.
Shift to low-interest debt
Have you checked if the rate of interest on your loan is in tandem with rates prevalent in the market today? For example, you may still be repaying a home loan at 9% while some lenders charge 8.5%. Even half a percent less can save you lakhs of rupees in the long term. You can transfer your loan to a cheaper one. Credit card balance can also be transferred to another card with a promotional, lower interest rate. Similarly, you can also consolidate your debt into a single loan. For example, instead of repaying a credit card balance, a personal loan, and a home loan, you can consolidate them into a top-up loan.
Keep increasing EMIs
With each passing year, you may see your income grow in some form while the size of your EMI may remain more or less the same. Use the increase in your income to amp up your EMIs. This will help you pre-pay more on a monthly basis, thus ending your loan quicker.
The writer is CEO, BankBazaar.com