A loan is a sum of money that you borrow from a friend, a relative or a financial institution such as a bank. While in the case of family or friends, you can simply get away by repaying the amount you borrowed; banks usually charge you with an interest that you need to pay in addition to the loan amount. More often than not, the interest rate may vary depending on the type of loan you avail. The Personal Loan Interest Rates may range from 11 to 26%, interest rates for a Home Loan range between 8.50% and 16%, while for Car Loan is between 9.50% and 14%. The interest+ principal on any loan ought to be paid in the form of Equated Monthly Instalments (EMIs) over a fixed number of years.
In a vast majority of cases, the EMI on loans varies from 25% to 40% of your average monthly income. While it is advisable that you adhere to strict financial discipline, so that you never fall behind on your EMI payments, there may be certain times when it can become exceedingly difficult for you to shell out a significant part of your income towards the same. Since skipping an EMI may result in a serious blow to your credit score, and might even lead the lender to take serious action against you, it is crucial that you know of some measures to deploy in the situation where you are unable to repay your loan as promised. Let us discuss these measures in detail.
When you Apply for Personal Loan or any other loan, the lender usually makes an offer wherein you can insure your loan, against a possible default. If you take the cover, it is the onus of the insurer to pay as many as three EMIs (or more, depending on your insurance plan) on your behalf, in case you suffer a setback such as a job loss, illness, and so on. While such an insurance may come off as an additional burden and even unnecessary at the start, it can help you ward off a major trouble in the coming times. Hence, if possible, you shouldn’t shy away from investing in the same.
In most cases, skipping a single EMI isn’t much of a concern. However, if things go haywire, and you are forced to skip as many as three EMIs in a row, it may lead the bank to consider your account as default. In such a situation you stand the risk of losing your collateral since the bank would likely put it up for distress sale. A great way to avoid this is to approach your bank and convey your problem. You can try and seek a grace period from the bank so that you can get your finances in order and pay the dues.
If you don’t see your financial situation getting better within the next months, you can ask the bank to restructure your loan in such a way that the EMI is reduced, and the tenure is increased. If possible, you should also try to ask the bank to reduce the interest rate considering your situation. In most cases, the bank will try its best to help you find a way out and would be willing to bend the rules slightly.
If you believe that the interest rate levied by your bank on loan is higher than the prevailing market rates, you can approach other lenders who are willing to offer you lower rates. In this case, you can conveniently transfer your loan to the bank providing the lower price. Not only will this measure help in bringing down your monthly EMI, but will also help you save a significant amount of money that would have otherwise gone towards your interest outgo.
Defaulting on a loan implies getting a blow on our credit score. More importantly, it can lead to the loss of your collateral. Hence, you should avoid this situation to the best of your abilities, even if it means that you need to dig into your savings. Your first, go-to saving must be your emergency fund, wherein ideally, you should have as much as three months’ worth of your monthly expenses.
In case you don’t have such a fund set aside, your next alternative is to make use of one of the inconsequential savings such as fixed deposit and liquid funds. If that doesn’t suffice as well, only then should you touch the more important ones such as your retirement fund or mutual fund investments.
Rather than knocking the door of a financial institution for a new loan to pay off your existing one, you should consider asking for some monetary assistance from your friends or family members. Not only will this save you from slipping into a debt trap, but will also help you tackle the issue at hand, without paying additional interest in the coming time.
While this may seem to be a little extreme, cutting down on expenses related to entertainment and dining out, can help you save a significant amount of money. Besides, you can also let go off of your cable network and internet connection for a few months. If it seems necessary, you should also cut down on your mobile phone usage in a bid to reduce the bills.
Some financial experts also suggest that you can refrain from paying insurance premiums for a few months, and then later revive the policy by paying a small penalty, once you are back on your feet.
All the savings from these measures can be easily used to pay your EMI on time, without facing the risk of your loan account being marked as default.
If you don’t seem to find a solution on your own, then it may be in your best interest to approach a dedicated counselling centre to seek help. Not only will they help you find a befitting solution to your issue, but will also save you from falling into a debt trap!
Like they say, ‘Prevention is better than cure’. In order to make sure that you don’t land in a situation where you find yourself unable to repay your loan, take the following few steps before you make this significant financial commitment:
We hope that the above-stated measures will help you repay your loan rather conveniently, even in grim circumstances such as job loss, or medical emergencies!
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