Loans are the credit instruments that are always there to help you in your financial tough time. Whether it be a personal loan that can be availed for multiple reasons or a home loan that finances your home purchase, the truth remains that they are to be repaid and that too with accumulated interest. With the online availability availing a loan has become quite easy these days, you need to fill the online application form, provide the required documents and fulfill the eligibility criteria of the lender, and it’s done. Once you are done with these processes, the repayment process starts which includes paying EMIs. If you have availed a loan with proper planning and analysis you can be a bit relaxed but if it is not properly planned, you can be caught in serious trouble later. Life throws up many surprises at you which may disturb your finances despite all the planning.
Here are smart ways to reduce the loan burden without stressing your wallet.
Always be in your budget:
Whenever it’s about managing your finances, it has to start with a budget. The budget not only gives you an idea of how much you are spending but also teaches you to live within your means.
Let’s start – you have to make a list of every penny you spent the previous month. Now let’s start the fresh chapter. Analyzing your previous expenses creates a budget for the next month. Cut all the unnecessary expenses, and try to live with your needs, not with your wants. At the month-end, you will surely notice that you have saved much more than what you spent without a budget.
Avail the tax benefits:
Well, all loans don’t bring tax benefits, but housing and educational loans do so. So, if you have decided to prepay any one of them which gives tax benefits, you need to do a cost-benefit post-tax analysis. Do the calculations and then only decide anything. Instead of clearing these first you can focus on those loans which do not offer tax benefits and have higher interest rates as well. Sometimes it may be worthwhile to retain a few loans which offer tax benefits.
Always go for an affordable EMI
Availing a loan can be fun for many as they get easy access to funds but repaying it can be tough as you need to repay much more than the principal amount. Hence, to keep the entire tenure peaceful for you, always go with the loan amount that you can afford to repay without stressing your monthly budget. To make the calculation easier, you can take the help of the online EMI calculator to know your EMIs in advance. This will help you to know your affordability and repayment capacity. Shorter loan tenure will indeed lead to lower absolute interest pay out, it will also increase your EMI burden. Hence, always remember to keep affordability as a primary factor when choosing your loan EMI amount.
Increase repayments with rise in income
One of the easiest ways to reduce your loan burden is to bump up the EMI’s rising income. This will not only help you repay your loan faster but will also give up a mental peace.
Let’s see how we can achieve this- Assuming you have an ongoing loan on you, you get an 8% rise in your income. To use your increased income in the right place, you can use it to repay your loan fast. For an 8% increased income you can easily afford to increase your EMIs by 5%.
Doing this will end your loan sooner than the tenure period and hence you will be able to focus on your other financial goals. In case you have multiple loans then try to end your higher interest loan first or if you have existing credit card debt, then clear them first.
If possible go for refinancing:
Loan Refinancing is a great option present with most of the loans. Availing a loan refinance or balance transfer not only reduces your interest but reduces your debt burden.
Refinancing basically means paying off the existing loan with a new loan either with the same lender or another. This is helpful when you are having an ongoing loan availed at a very high rate of interest or unfavourable tenure or terms and the same product is being offered by another lender at a cheaper rate.
To avail this facility you have to apply for a balance transfer with a new lender, the new lender will provide money directly to your previous lender to close your loan account and with them, your new loan account will be started.
Go for pre-payment or a part-payment whenever you can:
Pre-payment or part-payment is something that can reduce your debt burden without stressing your pocket. This is paying a lump sum amount to your lender whenever you have sufficient funds with you. You can either achieve this through your savings or you can use your incentives, variables, or bonus. But this is important to check while applying for the loan whether your lender provides this facility or not.
You can use your existing investments to repay debt
If you find yourself trapped in a debt burden, you can use your existing investments to get out of this situation. In such a condition, the options available to you which will not affect your finances or budget include- borrowing against your life insurance policy or a loan from your PPF account.
The PPF allows the investor to take a loan against the balance from the third financial year of investment made, and the borrowed amount can be repaid within the next three years. The maximum loan one can avail from your PPF account is up to 25% of the balance. The rate of interest charged on the borrowing is 2% more than the prevailing PPF interest rate. This makes it the most convenient option which can help you to repay your debts faster.
Following the above steps will surely help you to get rid of your debt burden faster.