How to Borrow Without Adding Financial Stress
There are times when you are in need of some additional funds to fulfil some financial obligations. As such times, one of the best alternatives is to Avail a Personal Loan. If you enjoy a reasonable credit history and can give proof of a steady source of income, you can procure the loan in an incredibly short time.
While such borrowing seems convenient, in some cases, borrowers often find themselves struggling with the repayment while managing their living expenses and other financial commitments. More often than not, such a strain on you and your finances can easily be avoided, simply by following certain beneficial tips. Let us help you with some of the most compelling ways, which can help you efficiently enjoy your loan!
1. Prioritise Your Loan Repayments
If you have more than one loan, prioritise their repayment in accordance with the rate of interest that you are paying on each one of them. Usually, Credit Card bills accrue the highest interest rates. Hence, it is recommended that you pay off any outstanding Credit card bills. Next, Personal Loans often attract higher rates as compared to car loans and Home Loans. Hence, if you can manage, prepay your Personal Loans with the maximum amount you can. Of course, while doing so, make sure that you have ample money left to pay the regular equated monthly instalments (EMIs) towards other loans, as well as that to manage your living expenses.
Not only will this effort give you the much-desired peace of mind, with lesser number of loans to take care of, but will considerably reduce your interest outgo in the long run.
Some people are tempted to pay off the smallest loan first. However, you must remember, it is not the loan amount that hurts your finances in the long run, but the cost of the loan, i.e., the interest rate. Hence, concentrate on paying off high-interest loans at the earliest possible.
2. Adjust Your EMIs
With the passage of time, it is likely that your income will increase. To enjoy the benefits of your increased revenues, increase your EMI. Even if you grow your EMI by just 5%, in the long run, it will help you enjoy a shorter tenure, as well as a substantial amount of savings which would have otherwise gone towards the interest.
3. Make Prepayments
When you gain any extra funds, in the form of a bonus, incentive or commissions and even income tax returns, use them to make prepayments towards your costliest loan. Rather than diverting this additional income towards materialistic expenses, make sure you prioritise the repayment of your loan.
To enjoy this benefit to the most, negotiate with your bank for a fairly low prepayment penalty. Most banks do not levy prepayment charges if the amount of prepayment is less than 25% of the outstanding loan amount. Moreover, as per Reserve Bank of India (RBI) guidelines, lenders are not allowed to levy this penalty on floating rate interest loans. However, it is recommended you check with your mortgage provider before taking this step.
Just in case, you are required to pay a substantial penalty for using this facility, weigh the charges of the same against the overall interest that you will be saving. Make the prepayment, only if it seems to be more profitable.
4. Use Your Investments to Pay Off Debts
A great way to use your investments to this end is to liquidate your fixed deposit. More often than not, a fixed deposit account will only earn you an interest of up to 10%. Hence, if you are servicing a loan that requires you to pay an interest of 15% or more, you might want to pay it off.
Furthermore, you can take a loan against your life insurance, or your PPF to repay a high-interest loan. Since your borrowed amount against the PPF only attracts an interest of about 10-11%, it is often cheaper than a Personal Loan interest in the range of 12-22% or a Credit Card interest which can be as high as 36-44%. However, you should only resort to this measure in case of an extreme financial burden. Since insurance and PPF are long-term investments, it is best that you leave hem untouched to reap the maximum benefits from them.
You can also acquire a loan against gold jewellery or gold coins if you hold any. Again, this measure should be taken only in cases where no options remain.
5. Consolidate Your Loans
If you have multiple loans and are finding it difficult to juggle between repayment schedules, it can be in your best interest to consolidate these loans. Debt consolidation refers to the process of acquiring a single low-interest loan to pay off multiple existing loans. While this will take some effort on your part, once done, this exercise will help you enjoy convenient management of your finances. Moreover, your overall interest outgo will reduce considerably.
You can further lower the interest rate by opting for a secured loan such as a Loan Against Property.
6. Cut Down Your Expenses
While an increase in income can work in your favour, it will only happen in due course of time. Meanwhile, you can work on cutting down on some extravagant or unwanted expenses such as dining out, entertainment or shopping. Simply adopting habits like eating homemade meals, paying in cash rather than using Credit Cards, buying groceries and other items of daily need in bulk, can go a long way in helping you save some much-needed cash. You can then easily use the money you manage to save to pay your EMIs.
While the tips mentioned above are most likely to assist you in reducing any unsolicited financial burden, if you still feel that you won’t be able to pay one or more EMIs, it is best to get in touch with your lender and convey the situation. Chances are, your lender will help you find a middle ground while ensuring that your credit score doesn’t receive a blow!
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