As per Avalanche strategy, apart from your monthly repayments, you can additionally try to repay loans that carry a higher rate of interest like credit cards, etc.
It is easy to get loans these days. If you have a regular income and a good credit score, getting a loan with very small to even large ticket sizes won’t be a big problem. You may get money in your account within a few minutes from a digital lender.
In the ongoing festival season, a large number of individuals are planning to get personal loans for various needs like weddings, education, medical expenses etc. In fact, a survey of 1400 respondents by IndiaLends and Innovation Cell of IIM Kozhikode recently found that as many as 65% of them were planning to take a personal loan ahead of the festival season. The survey found that around 81% of millennials between the age group of 25-35 years plan to apply for a personal loan in the immediate future largely for education purpose, followed by debt consolidation, wedding, etc.
Personal or other loans can be paid back in EMIs. While it is easy to get loans these days, it is also important to understand how you can save more while paying back EMIs.
Experts suggest that you can end up saving money if you strategically plan to repay your EMIs. They say that effective management of EMIs is an integral step towards financial freedom in the long run.
Know what to prioritize
Pranjal Kamra, CEO of Finology, says the key to strategic EMI management is knowing what to prioritize first.
“As per Avalanche strategy, apart from your monthly repayments, you can additionally try to repay loans that carry a higher rate of interest like credit cards, etc. Whereas big-ticket loans having tax benefits (like home loans) can be repaid as per your schedule. This can help you save some interest costs and become debt-free faster,” Kamra said.
“Consolidation of multiple loans into a single one can help in better EMI management and to save money on EMIs. One can also opt for restructuring the loan based on repayment capacity or transfer the balance to other banks that charge lower rates. However, living life entirely on debts can be troubling, both financially and mentally. Thus, the thumb rule is not to let EMIs fund the luxuries you don’t need / can’t afford yet,” he added.
Pre-pay in part or full
Anil Pinapala, CEO & Founder of Vivifi India Finance, suggests one should consider prepaying loans in part or full when he/she has extra cash in hand. But you should do it only when there is no prepayment penalty on your loan.
“It all depends on how you plan your personal finance. The key to having a healthy credit score is making your repayments on time which in turn is critical for all your future loan needs as well as for keeping interest rates low. Delayed payments or missed payments, needless to say, cause additional financial burden including late fee, penal interest, etc which again increase payment burdens,” Pinapala said.
“A smart thing would be to consider prepaying loans in part or full when borrowers have access to extra cash, but not without ensuring that there are no prepayment penalties or negotiate for waiver / lowered penalties for prepayment,” he added.
According to Abhishek Soni, CEO and Co-Founder of Upwards, there are two main strategies to save money while repaying your loans:
- Paying off/foreclosing your highest interest rate loans first: As the name suggests, these loans will enable you to save the maximum interest cost and reduce your debt burden gradually. Caveat here is that the highest interest rate loans will be smaller amount/smaller tenure and therefore absolute saving might not be much.
- Paying off/foreclosing your largest loans first: While some of your larger loans might come at a lower rate, the absolute monetary outflow on interest cost might be higher here (given the larger amount and longer tenure of such loans), hence trying to pay-off such loans first would be more beneficial.
“The actual choice between the above two approaches will often be hybrid and will be based on your personal free cash flows which you can pay off towards EMIs. You should calculate the absolute interest cost outflow per loan and then plan to pay-off the highest interest cost loans first which aligns with your free cash flows,” Soni said.